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China govt. researcher see flaws in fuel pricing

Posted on: May 30, 2009

Reuters – Sunday, May 24

By Jim Bai and Tom Miles

BEIJING, May 23 – China’s tightening fuel supply may have less to do with rising consumption than with expectations of price rises caused by the government’s pricing system, a government researcher said on Saturday.

China brought in the system at the start of this year with a promise that retail prices of gasoline and diesel would move more frequently than in the past and track crude oil more closely. But since then the reform has been beset by criticism.

“It’s mission impossible to keep the domestic market relatively stable and keep local prices in line with international prices when crude oil is going up and down quickly,” said Deng Yusong, a researcher at the development and research centre of the State Council, China’s cabinet.

Oil market analysts say the reform changed little from the old system of opaque decisions emanating from Beijing.

Those price changes were infrequent jolts that surprised everybody and pleased nobody, coming months behind international price movements and only when enough pressure built up.

“The problem of price lags between prices of refined fuel and international crude prices has not been solved by the new pricing mechanism,” Deng told a conference in Beijing.

Although the government keeps pricing decisions secret, it has divulged an imprecise formula: it will adjust retail fuel prices when a 22-day moving average of an unspecified basket of crude oil prices moves by more than 4 percent.

Instead of loosening the market, that has invited speculation, as everyone tries to see the next move coming.

“It’s rational to stock up when you expect prices to rise and to clear out stocks when you expect prices to fall, so you can make risk-free profits,” he said. “Fuel dealers can make a profit without any risk by buying ahead of an expected price change.”


Chinese media reports have said that oil traders in some areas, such as Sichuan province, traders are hoarding fuel and even delaying deliveries, effectively using their suppliers’ fuel tanks to build a speculative position.

“The price lags disrupt normal production and logistics activity,” Deng said.

The government has altered gasoline and diesel prices twice this year, as well as a big cut last December which helped sell the new pricing system. That is a much more frequent rate of change than in the past.

But rallying crude oil prices seemed to paralyse the price setting mechanism earlier this month, when the government cancelled a much-rumoured price rise just minutes before it was expected to be announced.

U.S. light crude <CLc1> has almost doubled to over $61.50 a barrel since plumbing lows close to $30 in January.

Sinopec Corp <0386.HK>, Asia’s biggest refiner, has said its refining business will run losses when crude oil is over $60. The Shanghai Securities News quoted Sinopec chairman Su Shulin as saying he was very worried about the current price. But he expected a decision by May 29, because the price reform was officially published on May 7 — 22 days earlier.

If the crude oil rally carries on the Chinese price setters don’t act, they risk getting further behind — and falling back into the old system.

“If the problem of these price lags can’t be solved, I think it’s very difficult to maintain a stable market,” Deng said.

“The price reform remains a transitional scheme within the reform process. In the long term, the final target of the fuel reform is to free prices and let them be decided by the market.”


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