Center

Fuel price cuts spark debate on controls

By Wang Yu (China Daily)
Updated: 2007-03-15 08:44

Han pointed out that the price cut by Total-Sinochem Fuels and CNPC was aimed at raising brand awareness, rather than starting a price war. A full-scale price cut is the last possible option within the strategically important energy segment in China, Han said.

China's oil products are priced based on the average price of international crude, plus adequate profit for refineries,tariffs and logistical costs. Oil firms can vary the final retail price by up to 8 percent.

CNPC and Sinopec dominate the local retail market with the lion's share of filling stations. Thus they have no strong motive to drop the government-set price.

Although the price drop will benefit ordinary end-users, it will not prevail in the market in the short run, said an official from global oil firm BP.

Crude refining is not a profitable business in China, given the government's stringent price controls. To fend off supply fluctuations and inflation, the government keeps a tight grip on the price of major oil products and makes sure it is below the global level.

Of course, CNPC, which enjoys high profitability from oil exploration and production, can easily take a cut in its retail profit, Han said.

Market-set price?

The price cut from both joint venture and State-owned stations has reignited another debate: whether price control should be lifted altogether.

David Ernsberger, Asia editorial director of Platts, a global energy information and market research provider, said the oil pricing mechanism in China should be more market-oriented.

"A market-based pricing system will generate immediate effects on supply and demand Of course, there are challenges in the process of reform and it will take time and a thoughtful pace," Ernsberger said.