The top economic planning body in China is determined to reform its oil pricing system to make it more flexible and acceptable to both consumers and refineries, according to media reports.

The Oriental Morning Post quoted an industry insider as saying that the National Development and Reform Commission (NDRC) was to unlink the price peg between locally processed oil products and the oil products in the three major markets of Singapore, Rotterdam and New York.

Instead they're planning to link local processed oil products to Brent, Dubai and Minas crude. Eventually domestic oil product prices would be based on the average cost of international crude plus cost and adequate profit following refining, tariffs and logistics.

China has set the price of processed oil products in line with the average in Singapore, Rotterdam and New York markets for five years. As the government only adjusts the oil price when the international price changes substantially (beyond 8 percent) consumers often find the final cost sluggish and easy to speculate.

"The peg switch from oil products to crude oil is really a breakthrough in the local oil pricing mechanism. The new pricing mechanism will be available for public review before December 11," an anonymous insider revealed to Oriental Morning Post.

A senior analyst with China National Petroleum Corp (CNPC) told China Daily that if the reported switch was true it could turn out to be a more scientific pricing mechanism than at present. 

"A mechanism based on international crude oil price, instead of oil product price, will more accurately reflect supply and demand and will prove to be subject to less vicious market speculation," he observed. 

The CNPC analyst, who asked not to be named, said the time was right for the Chinese Government to further reform its oil pricing mechanism to better reflect global oil supply and demand.

The analyst said that was because when the price gap between global and domestic crude oil wasn't too big local consumers would find a mechanism backed by international prices more acceptable.

More importantly the new pricing mechanism would potentially relieve pressure on loss-making local refineries, according to Cao Xiaoxi, chief engineer of Sinopec Economic and Development Research Institute. "For major local refineries, such as Sinopec, a more agile pricing mechanism will help them reduce losses and eventually make them profitable," Cao said.

Due to soaring international oil prices China's oil exploration and production business is hugely profitable. But the refining sector is suffering significant losses as the existing pricing mechanism is rigid in terms of adjusting the local oil price.

Although the NDRC has raised the price for processed oil products nine times since July 2003 it's still lower than the international level.

To fend off supply fluctuations and inflation the government retains a tight grip on the price of major oil products and keeps it below the global level. The NDRC raised the domestic oil price twice in March and May in response to the soaring global price.

(China Daily December 6, 2006)