In 1998, China carried out a significant reform on the gas price mechanism by promulgating Reform Plan for Finished Gas Prices, which stipulated the price of crude oil transacted between two group gas companies be settled through consultation. The price was made up of the basic price and a mark-up margin. The State Planning and Development Commission, based on average crude oil prices on international market in the last month, set the basic price. And the mark-up was negotiated by the buyer and seller. The prices of gas and diesel are subjected to governmental guidance. The Sate Planning and Development Commission figures out the basic retail prices through adding reasonable internal circulating expenses. Based on the basic retail prices, companies dealing in petroleum and petrochemicals decide specific retail prices within the range of 5 percent fluctuation. The reform has essentially established an oil price mechanism adaptable to international changes, with the market playing a major role in pricing under the governmental guidance.

Given the fact that a price mechanism in line with the international market has been established, changes in international oil prices would inevitably affect domestic oil prices accordingly. Since the Reform Plan was promulgated in 1998, great changes have taken place in international oil price. Since OPEC had decreased output to maintain prices, and international economic growth needs more oil, international oil price has seen a substantial increase since April 1994. And up to now, the petroleum price has risen by 100 percent on average; the prices of gasoline and diesel have gone up by 62 percent and 84 percent respectively. In accordance with principles in the Reform Plan, the internal finished oil prices were raised three times in November 1999, last February and May respectively, based on changes in international oil prices. But there is still a gap between domestic and international prices. Hence, the prices were raised twice last June and July on the base of the prices of May. That is to say, the petroleum prices have witnessed five incidences of increase since last November. And the prices of gas and diesel oil have totally soared by 42 percent and 37 percent. Up to now, the prices of internal petroleum and finished oils have realized their adaptability to international market in terms of price levels and price-forming mechanism, though this has happened one month later.

These rises of oil prices were required by a market-based price mechanism under governmental macro-control, with no purposes of making up for enterprises’ deficits. Based on the present prices of international petroleum and finished oils, petroleum and petrochemical companies may still face loss during refining petroleum after adapting to international market, due to certain gaps of techniques and management existing between Chinese companies and oversees counterparts. Keeping internal petroleum prices in line with international one is to exert pressure on internal petrochemical enterprises, in order to upgrade their technology and management, and to narrow down the gaps.

As the government has set the petroleum price mechanism in line with the international market, the petroleum price in the domestic market will be increased when international prices go up. If the international oil prices go down later on, the domestic price will be lowered correspondingly. At present, the international petroleum price is relatively high. It is difficult to tell the trend of the price in the near future. The crude oil price in the international market has gone down a little recently after Saudi Arabia, boasting the largest crude-oil export, unilaterally put forward a plan of increasing output. If the international crude oil price continues to fall and the average price of this month is less than that of last month, domestic oil price will drop soon.

China’s oil reserves and the present situation of Chinese petroleum industry have decided that domestic oil price must be in line with that on the international market. The petroleum output has failed to meet its increasing consumption, as the national economy enjoys a quick and sustained development and people’s living standards continuously to rise. China has become a petroleum importing country since 1993. In 1999, the import of crude oil amounted to 40 million tons, which made up 20 percent of the total volume processed in China. Furthermore, the import apparently shows an upward trend. Adapting prices of internal oil to the international market is helpful for petroleum and petrochemical companies to make the most use of domestic and overseas resources, and to guarantee internal market supply. Also after China joins in WTO, tariffs on petroleum and finished oils will be gradually lowered or even cancelled. Domestic finished-oil wholesale and retail market will be open to overseas multinational oil companies. The development trend objectively requires internal petroleum price be in line with the international market. Thus the country can provide a fair environment for internal petroleum companies and overseas counterparts to compete in. Still further, the realization of adapting to the international market is favorable for Chinese oil and petrochemical companies to participate in international competitions, enhance their strength, and therefore raise the competitiveness of the whole national economy. Oil is an important strategic resource. With the quickening steps of international economic globalization, oil and petrochemical companies must actively take part in international competition to develop themselves.

Adapting to the finished oils prices to the international market doesn’t mean that domestic consumers pay the same oil price as overseas consumers do. The measure just means that the internal petroleum price is as same as the international petroleum-transaction price, not as retail prices in other countries. From the point of view of preserving environment and restraining petroleum consumption, some Western countries levy heavy taxes on finished oils. In addition to consumption tax and value-added tax, gas and diesel in these countries are also levied petroleum-storage tax, environmental tax (or pollution tax) and so on. Hence, retail prices of gas and diesel oil in the domestic market are relatively low comparing with those in Western countries.

Increase of prices of finished oils does have negative effects on some enterprises with large volume of oil consumption. For this reason, the following measures have been taken. Firstly, oil and petrochemical companies are requested to reasonably arrange their production based on market demand and to guarantee internal supply by every possible means. They are also requested to standardize their operations, and to strictly implement concerned government price regulations. Secondly, heavily affected industries, such as agriculture, forestry and fishery, are given appropriate subsidies in various ways by the central government. Thirdly, appropriate adjustments to operating prices of railway and water transportation are made to offset risen cost caused by increases of oil price. Fourthly, some provinces and cities will accordingly lower taxi-managing fees and raise public transport fares to alleviate the price-rise impact. Fifthly, price management agencies in every area need to intensify supervision; any behaviors of overcharging and increasing prices without authorization will be confronted with heavy punishments based on the price law.

It should be pointed out that the oil price mechanism in the country needs further improvement, despite positive achievements that have been made. It is crucial for the success of the reform of oil prices to gain the understanding and support of consumers and all quarters concerned.

(Xinhua)