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Chinese Oil Companies Taking Advantage of Energy Consumers

Chinese Oil Companies Taking Advantage of Energy Consumers

Sometimes, China’s energy policies just make no sense at all. Consider the import and export patterns on oil products. In presumably socialist China, the oil majors PetroChina and Sinopec have been once again exporting oil products at much cheaper prices than those charged in the domestic market. This situation turns the entire concept of their monopoly of these products in China on its head. By having a monopoly, they were supposed to shield Chinese consumers from capitalist international market fluctuations and look after their interests. That’s not happening. Instead, it appears that they are exporting refined products in an effort to gain better prices on the products they sell into the domestic market.

In the first quarter of 2010, China exported 6.94 million tons of oil products, an increase of 66.4% over the same period of 2009. In March, export prices for gasoline and diesel were $737 and $683 per ton, respectively, but retail gasoline prices in big cities such as Shenyang, Beijing, Shanghai and Guangzhou ranged from $1,274 to $1,344 per ton. Even after subtracting about 30% for taxes (unclear exactly what is the tax level) the domestic price for those products has been much higher than that for exports. (China’s crude oil is mainly imported from Saudi Arabia, Angola and Iran, while oil products are mainly exported to Southeast Asia, Hong Kong and, even Panama.)

There is a presumed formula for the pricing. According to “Petroleum Price Management Trial Method” promulgated by the NDRC in May 2009, if during 22 business days, the crude price in the international market changes by an average 4%, the price of oil products in China will be adjusted. This policy is set by the government to limit the upper price of the oil products and to avoid the effect of sudden fluctuation of international oil price on China’s market. However, this policy has caused a major disconnect between the international crude price and the domestic oil product price. The monopoly of oil and gas by the national companies has made the situation worse.

Unlike the rest of the world, China’s oil product prices have not been adjusted by the market. Excessive supply doesn’t guarantee lower prices. On April 14, the NDRC pronounced domestic gasoline and diesel prices increases of $47 per ton (or $0.13 per gallon for gasoline, $0.15 per gallon for diesel) according to this pricing mechanism, even though there was an excess of oil products of 18.54 million tons at the end of March. The international crude price has been fluctuating since then and it is expected that the oil product price will increase again in the middle of May.

This is exactly a repeat of last year’s situation. In 2009, China’s oil product wholesale and retail prices had been increasing and there was a shortage of oil products. From January to August 2009, China exported 14.96 million tonnes of oil products with the average price of $444.5 per tonne, or $1.337 per gallon. However, gasoline prices in Beijing went as high as $3.70 per gallon during the same period.

Oil companies claimed that the domestic price was set by the government and not controlled by them. However, China’s automobile owners have been blaming the oil companies claiming that they are manipulating prices and trying to gain as much profit as they can domestically.

Now the government is under substantial public pressure for oil products pricing. To protect the refinery business, the oil majors can either increase the oil product wholesale price or stop supplying the oil products to gas stations to push the government to increase the price even if the government refuses to do so. Under such circumstances, the government is running out of options but to reform the pricing scheme. As PetroChina CEO Jiang Jiemin said during a meeting in March, although generally the NDRC pricing mechanism runs smoothly and fits China’s characteristics, it has ill effects on oil products processing and marketing. He advocated a policy that would allow prices to fluctuate so that they reflect the gyrations in the international crude market.

Along with the conflict between the coal supply and coal fired power generation, the pricing quandaries of the domestic natural gas and the imported natural gas, oil products pricing has become another headache in China’s energy sector.

By. Xina Xie

Source: Energy Tribune




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