Awkward Prices of Oil Products and Disputed Subsidy

Prices of oil products continue to rise on one hand; profits of
refineries climb repeatedly on the other hand

In 2006, Sinopec Corp. posted an excellent fiscal report with
a profit of RMB50.6 billion. Yet Wang Tianpu, CEO of Sinopec
Corp., pointed out that Sinopec Corp had experienced huge
pressure, suffering losses in its refining business due to
governmental policies. For this reason, Sinopec Corp. again
obtained a subsidy of RMB5 billion from the Ministry of Finance
at the end of 2006. This is the second year in a row for Sinopec
Corp. to obtain a subsidy for refining business. At the end of
2005 the Ministry of Finance paid Sinopec Group a lump-sum
subsidy of RMB10 billion, of which Sinopec Corp. and its
subsidiary companies obtained a lump-sum subsidy of RMB9.415
billion.
    Although the subsidy was criticized by many organizations
and media, it had its supporters. Professor Pang Changwei of
China University of Petroleum argued that Sinopec Corp. hands
over around RMB50 billion of profits and taxes each year to the
government, and so, proportionally, a subsidy of only RMB5
billion is not too much as a return. Han Xiaoping from China
Energy Net said that the government required the company to sell
oil products at prices that did not respond to the market, hence
the government should foot the bill for losses.
    Facing bitterness from the public, spokesman of Sinopec Corp.
board of directors explained: "Sinopec Corp. is state-owned and
the largest refining enterprise in China, processing 54% of the
nation's crude oil and supplying 64% of the nation's consumption
of petroleum products. It is charged with the major task of
providing a stable supply of oil products inside China.
International crude oil prices continue to climb, while domestic
oil product prices lag far behind, proportionally. The
government gives subsidies to Sinopec Corp. in order to
compensate for its huge sacrifice for the stabilization of the
Chinese economy and to benefit the people."
    In Sinopec Corp.'s view, as of the end of September 2006,
since domestic oil products prices have been shielded from
international crude oil price increases, although the National
Development and Reform Commission had raised the prices many
times, the loss was still around RMB900/t. But what is the actual
situation? The owner of a private gas station in Hainan province
said that the purchase price of gasoline from the two oil giants
(CNPC and Sinopec) on April 23rd, 2006 was RMB5 300/t, while the
government's highest price allowed was RMB4 744/t at that time,
i.e. RMB556/t over the allowable price. Sinopec Corp.'s own
newspaper also reported on October 18th, 2006 that when the
international crude oil price was US$1.47/gallon, equivalent to
RMB4 118/t, domestic wholesale price of crude was RMB6 585/t,
which was RMB2 467/t over the international market, or 59.9%.
    Because Sinopec Corp. possesses a complete industrial
petroleum chain from the uppermost reaches of exploration and
mining to downstream of processing and sales, its claimed loss
of profit in its refining business has actually been distributed
into its other subsidiaries, branches and gas stations through
wholesale and retail links, therefore Sinopec Corp. should
completely resolve its loss in refining business internally and
reasonably allocate profits of every section, an analyst
comments.
    The refining loss Sinopec Corp. experienced was caused by
pricing policies. Policies are set by the government, and
therefore the government must make compensation for Sinopec
Corp.'s loss. But why did the government compensate only Sinopec
Corp.? The same policies influence the whole refining industry,
and financial compensation is also an aspect of taxation. The
financial department utilizes taxation to reallocate income for
the purpose of fairer income allocation. If no compensation is
made for the whole industry, the individual compensation for
Sinopec Corp. appears unfair.
    This subsidy shows that the Chinese government has yet to
straighten out the oil industry in many dimensions ranging from
efficiency to price, and it is still in crisis.

Referring to the government's allowance for oil products prices,
professor Zha Daojiong of the School of International Studies,
put forward the view that low oil product prices benefit some
individuals but make it impossible to maximize benefits
nationwide.
    From the viewpoint of individual consumption, of course the
lower oil product prices are, the better. This is true for people
who already rely on cars for daily transport, it is also true
for those who wish to own cars. As for the automobile
manufacturers, low oil product prices favor selling more
automobiles. On a broader level, growth of the automobile
industry favors growth of related industries such as iron/steel,
and provides relatively stable employment opportunities for
every section of such industrial chains as automobile production
and after-sale service. The growth of the automobile industry
relies on a steadily growing market for automobiles.
   With more automobiles, more and more people have bought
additional freedom to choose their own time and mode for going
out. But at the same time auto and bus traffic within cities slows
down, and serious traffic jams often occur. A driver hopes to
comfortably and swiftly arrive at his destination, but in fact
often finds it more and more difficult to reach this goal. If
slower travel speed is to be the price of going about in the
comfort of one's own auto, then the very notion of public
thoroughfare is undermined.

By comparison, raising oil product prices is a feasible method
to moderate the proliferation of cars. But some may argue that
car owners are part of the public. Indeed, rising oil product
prices will directly increase expenses of car owners. How to be
fair to those private interests?
    To set a successful public policy, it is necessary to
consider the difference between discretionary and
non-discretionary expenses. The term "non-discretionary
expenses" indicates the part of individual wealth that must be
used for basic living expenses, such as water, power, healthcare
and education. Governmental policy must moderate any increases
of non-discretionary expenses. In the transportation field,
fares for public vehicles belong to this non-discretionary
category, whereas owning a car is a choice of living modes - a
discretionary expense. The government has no obligation to
guarantee a low cost of car ownership, per se. By the same token,
government is obligated to combat poverty but has no obligation
to guarantee individual wealth beyond some normative level.
   Although the present low oil product prices are certainly not
the only inducement to buy or use a car, the prices obviously
do nothing to reduce the sale and use of autos. This is because
low oil product prices reduce the cost of driving, therefore also
reducing the natural consideration of alternatives.
    One of the current ideas in the public discussion of China's
resource pricing policies is to include the costs of
environmental threats and the exhaustion of non-renewable
resources in the pricing of products such as oil, natural gas,
water, power, coal, lan