China’s long-awaited oil pricing reforms have finally been unveiled. But the system may have become less, not more, transparent.
First, some background. In 2008, the government introduced a system of setting retail prices which in theory would raise or cut regulated prices of gasoline, gasoil and kerosene if the rolling 22-working day average of a basket of Cinta, Brent and Dubai benchmark crudes fluctuated more than 4%.
The aim was to move domestic prices closer in line with international crudes so they would reflect the crude procurement costs that refiners bear. This was particularly pressing given the dramatic boost in China’s crude imports, from 30% of its total needs in 2000 to just under 58% last year.
In reality, the system only worked well under two conditions: when oil prices were around $100/barrel and when inflation in China was relatively benign. In much of 2011, when record inflation loomed, the government, worried about the impact on economic growth, made little move to adjust prices upward. That resulted in refiners bleeding at the pump and in some cases curbing production, causing shortages in some areas.