China Oil Fund Fuels Criticism

China's oil fund plan reflects policy confusion, energy experts say.
By Michael Lelyveld
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BOSTON--China's government is reportedly planning a large fund to help control oil prices as its energy policies remain in flux.

On Jan. 9, the state-controlled China Daily said the country would establish "a giant government-led fund along the lines of the National Social Security Fund in a bid to stabilize oil supply, demand and prices." The report, citing Guangdong-based Newexpress Daily, followed a similar account by the refining industry publication SinopecNews.

The fund, which reportedly awaits approval by the State Council, would be used to build up crude oil reserves and "increase the negotiating power of China in oil trade with other countries," China Daily said.

"Countries like Iran and Russia already have their oil stabilization funds, which help protect them from the fluctuation of international oil prices and stabilize their national economies," the English-language daily said.

The problem is that the oil funds in those countries do just the opposite, according to analysts. Instead of using government money to keep oil prices from fluctuating, those funds use windfall oil profits to support long-term projects that need stable revenues when oil export prices fall.

"Here [in the case of China], funds will be collected to control the market and subsidize certain players in the market when prices are against them," Philip Andrews-Speed, a China energy expert at Scotland's University of Dundee, told Radio Free Asia.

"It's absolutely the other way around and really shouldn't be called an oil stabilization fund," he said.

Twists and turns

The contradiction is one of several recent twists and turns in China's oil pricing policies as the country's consumption and import dependence has grown.

In December, the National Development and Reform Commission (NDRC) unveiled a new system of consumption taxes for motor fuels, raising hopes that the government would promote conservation and end its wasteful system of price controls.

In implementing the system on Jan. 1, the government abolished a series of tolls and fees to win support from the public for the new tax. The NDRC cut average gasoline prices by about 14 percent on Dec. 19, helping to make the tax policy popular.

On Jan. 13, the NDRC "ruled out" any more reductions, the China Daily reported. "We found there is no room for further retail price cuts at the national level," a spokesman was quoted as saying.

Although world oil prices have fallen below $40 per barrel, the government argued that the country's manufacturing cost was $80-90 per barrel because of refining. But one day later, without explanation, the NDRC announced it would cut prices by a further 2 percent, state media reported.

The Reuters news agency called the price-setting process "opaque," saying it had left the market "in the dark and guessing when a change would materialize, as in the past."

Susbsidies kept?

Experts had hoped China's government would adopt market reforms and end its huge subsidies to state-owned refiners for selling fuel below cost when world oil prices are high. But instead, it appears that the oil fund is designed to make subsidies more available, said Andrews-Speed.

"It's almost saying, we know we're not going to make any changes, so we might as well firmly establish what we've been doing on an ad hoc basis for two or three years," he said.

China's rigid price controls often prove costly whether world oil prices are high or low. When oil prices are high, the government has to pay subsidies to refiners to keep fuel charges from rising and creating social tensions. When oil prices are low, fuel costs remain high while refiners try to recoup lost revenue.

Despite the a 74-percent drop in world prices over the past six months, China's retail fuel prices remain stubbornly high. Even with the latest cut in fuel prices, China's drivers are paying 65 percent more than consumers in the United States, based on U.S. Department of Energy data.

Robert Ebel, senior adviser to the energy and national security program at the Center for Strategic and International Studies in Washington, said the contradictions in China's policies suggest confusion among officials rather than a commitment to reform.

"I'm not sure what they really have in mind other than controlling oil prices," said Ebel.

The plan for an oil fund appears to be an exercise in camouflage, he said.

"They may want to continue subsidies but call it something different," said Ebel. "Subsidies have gotten to be a nasty word in the world oil industry because they stimulate consumption."

The contradictions on price cuts and the stabilization fund seem to reflect an internal debate about how to repackage past practices rather than a decision to discontinue them, he said.

"I'm not quite sure what the Chinese have in mind. Maybe they know, but maybe they don't know," said Ebel. "They're just trying different approaches to keep a control over oil prices without calling that control subsidies."


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