Post-Olympic Oil Prices in China

By Zhang Xiangdong
Published: 2008-08-27

From News, page 3 issue no. 382 August 25, 2008
Translatied by Ren Yujie
Original article:

As inflationary worries have subsided, Chinese regulators have begun tinkering with the idea of raising domestic retail petrol prices.

To control inflation, decision makers carried out energy price intervention policies in the first half of this year, which led to tight domestic energy supply and petrol shortages.

However, as global petrol prices have dropped recently, domestic inflation pressure has likewise relaxed, providing an opportunity for the government to adjust domestic energy prices and ease the heavy subsidies that have enabled the price caps.

The EO learned that an increment by 1.6 yuan per liter of petrol was what officials at the National Development and Reform Commission (NDRC) were considering. The current retail petrol prices ranged between 5.8 and 6.6 yuan per liter depending on type and quality.

Decisionmakers were poised to intensify retail petrol price reforms now that the Beijing Olympics were over.

A source from the NDRC revealed that high-level officials assumed that low domestic petrol prices would fail to hold as global ones continued to rise, and that the government be unable to bear large financial subsidies in the long term.

Moreover, NDRC official revealed that once domestic petrol prices were in line with global ones, the government could cancel financial subsidies to certain petrol businesses, and divert them to other disadvantaged groups and industries.

However, whether to wait for a more appropriate time or raise petrol prices in one swoop was still uncertain, as the NDRC had predicted that global petrol prices could possibly drop another 10 to 20 US dollars per barrel.

China's price intervention policies, aimed at controlling inflation, pushed both PetroChina and Sinopec to stop or constrain petrol supplies in some areas of China. Figures from the China Petroleum and Chemical Industry Association (CPCIA) said the two oil refining businesses lost 5.71 billion yuan in the first half of 2008, which was 47.9% higher than the same period last year.

The NDRC's moves to raise petrol prices were generally considered as "reluctantly forced". The price adjustments made on June 19 were realized because the two groups skipped the NDRC and applied to even higher levels in government.

Although high-level bodies had already decided to adjust petrol prices, the departments charged with taking specific actions were still being cautious.

Recently, the NDRC has been ambiguous in public over any such price adjustments.

On August 18, Director General of the National Energy Bureau Zhang Guobao said that after the Olympics, petrol prices would be adjusted following overall economic development and domestic and global energy conditions at that time.

One day later, the NDRC announced a sudden raise of on-grid electricity prices.

One insider at the NDRC said that within the agency there was support for adjusting petrol prices when both CPI and global fuel prices were dropping.

Others in the agency stressed that global fuel prices would drop to below 100 US dollars per barrel in the next six months, and that they should continue to wait for a better time. They added that raising petrol prices at this moment might cause a resurgence of the CPI.

Internal factors and interpretations of global fuel prices has traditonally constrained government proposals since the implementation of China's petrol price reform. One specialist from the energy research institute under the NDRC told the EO that the past 10 years have showed that China has consistently failed to seize the optimal opportunity for petrol price adjustments.