Are Huge Profits to Be Readjusted?


State-owned oil corporations have already monopolized upstream
resources. Today they are increasing the selling price of end
products. Is it that they are allowed by the state to reap huge
profits? Every time oil products have a price rise, indignant
consumers will raise such a question.
   The circular concerning the price readjustment issued by the
National Development and Reform Commission this time has made
a clear-cut reply to this question: Oil production corporations
selling domestic crude oil should pay a "special earning fund"
from the date of the price readjustment. The Ministry of Finance
issued a specific policy on April 4th, 2006. The starting point
for the payment of the "special earning fund" is US$40 per barrel
and there are 5 grades from 20% to 50% up to over US$60 per barrel.
The specific rates are determined by the monthly weighted
average price of crude oil sold by oil production corporations.
(CCR2006, No. 11)
   The "special earning fund" defined by the Ministry of Finance
is the fund levied by the state on the excess income gained by
oil production corporations selling domestic crude oil at a
price beyond a certain level. According to experts, the "special
earning fund" is in essence the "huge profit tax" and the purpose
is to control high profits in the oil sector.


Huge profits guilty?


According to a professor from the School of Business
Administration, China University of Petroleum, the collection
of the "huge profit tax" is popular in some large oil producing
countries. At the time of oil price rise, in particular, the
premium from the price rise is taken over to the national finance
so as to adjust the imbalance in the distribution of social
income. The basis for the justification of the "huge profit tax"
is that huge profits gained by these corporations are from
monopoly resources they hold.
   The indignation of Chinese consumers to state-owned oil
corporations is understandable. The output of crude oil in China
has been maintained at around 160 million tons for many years.
With the oil price rise from US$9 - 10 per barrel in the past
to over US$60 per barrel today, the total profit of the three
major oil corporations increased from nearly RMB10 billion in
1998 to nearly RMB200 billion in 2004. In the 2005 performance
statements issued by CNPC, Sinopec and CNOOC from late March to
early April 2006, they gained a profit of RMB133.36 billion,
RMB39.558 billion and RMB25.323 billion respectively in 2005.
CNPC replaced Toyota and became the most profitable listed
company in Asia.
   It is because of the mode of huge profit and oligarchy that
oil companies can hardly get rid of the suspicion that they reap
huge profits from the high oil price.
   A deputy chief engineer from Sinopec Economics & Development
Research Institute has however pointed out that the profit
making behavior in the two large oil corporations CNPC and
Sinopec in China is not completely the same as international oil
companies. The two large oil corporations in China have no full
right to the pricing of oil products in the domestic market and
there is basically no possibility of their gaining high profits
at the expense of consumers.
   As a matter of fact, even if “the more oil refining they do
the greater loss they suffer”, CNPC and Sinopec have still tried
their utmost to guarantee the market supply. Even the director
of the State Asset Commission has come out and made clarification
for these two oil corporations. In face of the public
dissatisfaction at the price rise of oil products made on the
previous day, the director of the State Asset Commission pointed
out on March 27th that CNPC and Sinopec have always sacrificed
their own interests to ensure a stable development of the
national economy. In 2005 Sinopec made a subsidy of RMB51.2
billion and CNPC also made a subsidy of over RMB31.0 billion for
the price difference between crude oil and oil products.


Resort to financial and tax means


Huge profit is a fact. Loss in oil refining is also a fact. The
direct reason for the profit polarity between upstream and
downstream sectors is the low price of oil products in the
domestic market.
   As has been pointed out by the deputy director of the
Comprehensive Research Office, the Research Institute of Market
Economy of the State Council Development and Research Center,
the National Development and Reform Commission has been
unwilling to increase the oil price to a reasonable level because
it hopes that oil corporations can perform the role of
stabilizing the oil price. In terms of social justice, it seems
that as the two large oil corporations monopolize oil/gas
resources upstream gains can very well compensate for some of
downstream losses. That thinking is however not realistic
because it has confused the earnings gained by oil companies
through their own efforts with the profits gained through other
factors (such as price factor and supply/demand factor). It will
therefore inhibit the improvement of both social efficiency and
company efficiency.
   To solve this problem, work should be done in two aspects.
The oil price should be readjusted according to market rules and
monopoly profits should reach social justice through macro
control. In this way the importance of improving financial and
tax policies in the pricing mechanism of oil products can be
fully displayed. An economist from the Economic Department,
China Representative Office of the Asian Bank, has pointed out
that the reform to the pricing mechanism of oil products is a
systems engineering. Great attention should be paid to reform
measures of the entire industrial chain and these measures can
be adopted mainly through financial and tax policies.
   Decision-making departments already paid due attention to
the problem of readjusting the profits in resource corporations
through financial and tax means in the past. From July 1st, 2005
the Ministry of Finance and the State Taxation Bureau started
to raise the rate of the oil/gas resource tax on oilfield
corporations. It was the first readjustment to the oil resource
tax in the past 13 years. The resource tax for crude oil in
Qinghai Oilfield increased greatly from RMB8.0 per ton to
RMB30.0 per ton. The resource tax for viscose and high freezing
point crude oil in other oil corporations increased from RMB8.0
per ton to RMB14.0 per ton.
   According to experts, the rate of the resource tax for crude
oil after readjustment was only 1.5%, much lower than the world
average level of 10%. Nevertheless, a first step in the reform
to the resource tax has been made. It shows that China is
determined to use financial and tax means to solve the serious
polarity between upstream and downstream earnings.


Three major doubts


Although the collection of the huge profit tax has become a
common understanding, some people still have doubts. An expert
from CNPC has pointed out that due to the features of high input
and high risk in the oil sector it must conduct centralized
operation. It is therefore not fair to levy the huge profit tax
in the name of monopoly operation. "It is very difficult to
discover oil resources. The collection of the huge profit tax
will likely