Oil Products Pricing Criterion Needs Reforming

On January 11th, 2007 the price of WTI (West Texas intermediate)
crude oil futures dropped to the lowest point of US$51.9 per
barrel since June 2005. The National Development and Reform
Commission (NDRC) issued a notice on January 14th, 2007 deciding
to reduce the price of gasoline by RMB220 per ton to RMB4 980
per ton from the same day. The ex-factory price of aviation
kerosene was also down by RMB90 per ton. It is the first downward
readjustment to the price of oil products since May 2005.
   Factors for readjustments to the price of oil products
include the crude oil price in the international market, the
performance of refining companies in China, the consumption
reduction and energy conservation and the bearing capability of
domestic common consumers. In case the crude oil price in the
international market is low enough such as a little more than
US$50 per barrel today and the low price can last for a
considerable period of time, various parties of the oil
industrial chain in China will likely reach a sort of balance
of interests. Refining companies can reduce loss. Consumers can
enjoy a low price. What is more important, NDRC who is trying
to formulate an oil products pricing criterion able to truly
reflect the crude oil price trend in the international market
can finally find an optimal chance to issue this criterion.

Ups and downs

The demand reduction of heating fuels caused by the climate
warming in Europe and America and the inventory increase of oil
products in the United States have led to a drastic drop of the
crude oil price in the international market since 2007. In July
2006, the crude oil price in the international market rose to
almost US$80 per barrel, hitting the historical high. It started
a gradual reduction in August 2006 and came down to US$51.9 per
barrel on January 11th, 2007.
   The price of oil products in China before the readjustment
made this time was based on the crude oil price of US$70 per
barrel in the international market at the end of May 2006. The
crude oil price in the international market had ups and downs,
but the price of oil products in China remained unchanged. As
the director of the Energy Research Institute of NDRC pointed
out, if the crude oil price in the international market could
be maintained at around US$50 per barrel the Chinese Government
would likely reduce the price of oil products in the domestic
market.
   What people appreciate most this time, however, is not the
reduction margin but the attitude. Compared with the growth
margin of RMB500 per ton in the upward readjustment made to the
price of oil products at the end of May 2006, the reduction margin
this time is much smaller.
   During the period in between, in spite of sustained high oil
price the sales amount of automobiles has kept increasing.
According to the statistics, the sales amount of automobiles was
7.38 million units in 2006, an increase of 20% over 2005.
    When the upward readjustment to the price of oil products
was made at the end of May 2006, officials from NDRC said that
it was first intended to make a linkage to the crude oil price
in the international market. Another reason was to promote
consumption reduction and energy conservation through pricing.
Regarding the downward readjustment made this time, some experts
worry that it may stimulate consumers to increase gasoline
consumption and lead to the increase of tail gas emission and
the aggravation of energy waste.
   The target of 4% consumption reduction and energy
conservation fixed by the government was not attained in 2006.
It will also be very hard to attain the target in 2007. An unduly
big reduction margin in the price of oil products would evidently
add difficulties to the attainment of this target. NDRC has kept
silent so far about whether this factor is already considered
in the readjustment made this time. Another factor, however, is
self-evident: Refining companies in China continued to suffer
loss in 2006.

Loss in refining

The president of Sinopec Corp. said on January 5th, 2007 that
its refining operation suffered a loss of over RMB50.0 billion
in 2005 and a loss of RMB45.5 billion in 2006.
   It was because of this that the company gained another
lump-sum subsidy of RMB5.0 billion from the government at the
end of 2006. In case the crude oil price starts a drastic rebound
whereas China makes no new readjustments to the price of oil
products, Sinopec will meet serious setbacks.
   According to analysts, as the reduction margin to the price
of oil products is much smaller than that of the crude oil price
in the international market and the price of diesel is not
included, the refining operation in various companies still can
earn profits. The major product in Sinopec is diesel and the
proportion of gasoline and aviation kerosene is small. The price
readjustment made this time, therefore, will produce no great
impact on the production and profit of the company.
   "The price of gasoline in the domestic market was RMB5 200
per ton and the price of diesel was RMB4 570 per ton in December
2006," said General Manager of CNPC. "The price of gasoline and
diesel in Singapore was RMB5 509 per ton and RMB5 352 per ton
respectively. The price difference between the domestic market
and Singapore was RMB309 per ton for gasoline and RMB782 per ton
for diesel."
   As the crude oil price in the international market has been
maintained at around US$55 per barrel for some time, the high
price of oil products in the domestic market fixed on the basis
of a crude oil price of US$70 per barrel has no reasons for
existence. In the first half of 2006, the net profit gained by
CNPC reached RMB80.6 billion and the net profit gained by Sinopec
reached RMB20.7 billion, quite enough to bear the small-margin
readjustment made to the price of oil products this time.
  
Price and criterion

Whether making an upward readjustment or a downward readjustment,
it is hard for NDRC sandwiched by oil giants and consumers to
win applause from both sides. The key today is not finding ways
of price readjustment to meet expectations of various parties,
but formulating a market pricing criterion that promotes a fair
and rational oil price linkage between the domestic market and
the international market and is acceptable to various parties.
   The downward readjustment made to the price of oil products
this time has provided oil products pricing criterion reform
with a full space for imagination. According to a deputy
president of School of Business Administration of China
University of Petroleum, the new oil products pricing criterion
should be issued at the time of real oil products price linkage
between the domestic market and the international market. A new
criterion issued at the time of low oil price will cause no social
tremors
   In a matter of half a month starting from December 29th, 2006,
the crude oil price in the international market dropped from
US$61.05 per barrel to less than US$55 per barrel. The rapid
price reduction shows that the crude oil price in the
international market is not stable today. An accurate
expectation to the crude oil price trend in 2007 can hardly be
made. It is still not certain that the crude oil price