From Comments, page 15, issue no. 340, November 5th 2007
Translated by Liu Peng
Original article: [Chinese]

November 1- The Chinese government raised petrol prices by 0.4 yuan per liter, no small increase for consumers. We deserve a solid argument for why we must bear this new cost.

While global crude oil prices rose from 50 to 95 dollars per barrel, the cost of China's processed oil has remained static for 17 months. As a market economy, China’s oil prices should reflect the market’s supply and demand: When supply tapers, prices must increase.

Domestic processed oil prices are reportedly the inverse of global crude oil prices. With global crude at 80 dollars per barrel, refineries would lose 1,000 yuan processing each ton of oil. The oil industry told consumers that higher prices are meant to encourage production and ensure market supply. This is an unsuitable explanation for the rise.

Despite the price of crude oil nearing the 100 dollar per barrel mark, this is just an asking price. Through various hedging tools, oil firms can find and take advantage of domestic oil sources. So why the fuss over only 80 dollars? In its third quarter report, Sinopec stated that for the first nine months, the purchase price of oil decreased 400 yuan since last year, putting the average cost of oil at only 60 dollars per barrel.

Sinopec's financial reports also claimed that refineries lost 5.2 billion yuan in the past three quarters, but the company's net profit for the same period was nearly 50 billion yuan. Would Sinopec exaggerate its marginal losses for shareholders? No one has been able to tell us whether the company will receive a government subsidy this year, but last year Sinopec's losses earned the company 5 billion yuan.

Domestic oil giants claim that due to the oil supply shortage, ramping up operations would still leave them unable to meet market demand. But China’s processed oil exports have gone up by 30 percent in the first three quarters. Aren't the oil giants in charge of international sales?

We are told that the government focuses on state-owned enterprise as the driving force of economic development. Is it not time for them to step in, take charge of this responsibility, and fill the vacuum left by refineries’ freezing production? Building their wealth in the name of state monopoly, they must assume social responsibility. It is said that the price hike is supposed to reform the oil price regime. Indeed, as global oil prices continue to increase, domestic oil prices remain below international ones. Domestic pricing must be on par with the global market, but history shows that it often is not.

When oil price reform began, domestic prices were higher than the global rate. Why weren't Chinese prices adjusted to match the global rates? It was to protect the the oil giants' interests.  From March to May 2006, domestic processed oil prices increased twice as global crude rocketed to ＄70 per barrel. The combined increments resulted in a price of 800 yuan per ton. However, when the global rate dropped to ＄55 per barrel earlier this year, domestic processed oil prices were only lowered by ＄220 per ton. 
This is an unacceptable method of meeting international standards. When will the government place consumer interests above those of the oil giants? Why should the consumers pay to protect the oil giants' interests?

We heard that a price hike would benefit energy conservation. China imports over 100 million tons of oil, comprising 40 percent of the nation's total oil consumption. Raising the bar on price structure to a reasonable extent would promote the cultivation of a conservation-oriented society. But in a competition-free market, who is charged of establishing reasonable prices?

Based on the price reform formula, the price of processed oil is comprised of the combined oil cost, refinery costs, and a reasonable margin. That’s fair enough, but what is the benchmark for assessing effective production costs and reasonable profit margins? When personnel at these enterprises enjoy high salaries and benefits, is the cost absorbed into the reform scheme? Is that reasonable?  We support the need for the domestic oil price to match the  international standard and the call for energy conservation. But consumers would be hard-pressed to accept the price hikes if these well-intentioned reasons become excuses for oil giants to engage in profiteering.