China Sets Floor For Fuel Prices

An analysis by Michael Lelyveld
china-gas-station-jangzhou-jan13-2015.jpg A Chinese worker refuels a car at a gas station in Yangzhou, east China's Jiangsu province, Jan. 13, 2016.

As troubles mount for the economy and the environment, China's government has been introducing a series of seemingly contradictory energy policies.

On Jan. 13, the National Development and Reform Commission (NDRC) announced a new pricing formula for motor fuels that suspends price reductions whenever international crude costs fall below U.S. $40 (263 yuan) per barrel.

The regulation came two weeks after the government planning agency said it was withholding a scheduled price cut for consumers under its previous formula, pending changes to its price-setting rule.

Under the old system in place since 2013, fuel prices were adjusted whenever international oil prices varied by more than 50 yuan per ton (U.S. $1.04 per barrel) over 10 working days.

That system was designed to reflect market forces while protecting consumers against sudden shocks during periods when crude prices were high, sometimes topping U.S. $100 (658 yuan) per barrel.

But with the plunge in world oil, the NDRC first announced it would skip a scheduled price break on Dec. 15 "to promote energy conservation and tackle air pollution," the official Xinhua news agency reported.

The NDRC did not say it was working on a new formula until Dec. 30, when it suspended a second expected price cut.

The machinations drew "a storm of complaints from the public," the official English-language China Daily reported.

"It is natural for Chinese drivers to envy their counterparts in the United States as pump prices in the U.S. have fallen below U.S. $2 (13.10 yuan) per gallon, about half the price in China," the paper said. "Unfortunately, that kind of cheap gasoline is not what the country can environmentally afford."

Western reports were quick to point out that the new rule was aimed at protecting China's struggling national oil companies, at least as much as the environment.

"China's three big state-controlled oil companies employ millions of people, and leaders in Beijing want to avoid the kind of drastic job cuts the industry has endured around the world," The Wall Street Journal said.

The NDRC admitted as much in a statement saying that lower oil prices "are not conducive to the long-term healthy development of our country's oil industry."

The effects of low prices on the three oil giants have been severe.

PetroChina, the listed arm of China National Petroleum Corp. (CNPC), suffered an 81-percent drop in last year's third-quarter earnings, while profit during the period fell 92 percent at China Petroleum & Chemical Corp. (Sinopec).

China National Offshore Oil Corp. (CNOOC), which does not report quarterly earnings, recorded a 32-percent drop in revenue.

Complicated contradictions

But the contradictions in the new pricing policy have been even more complicated than the mixed motives behind the rule change.

The new price "floor" was announced after crude had already plunged to U.S. $32 (210.60 yuan) per barrel. Yet, the NDRC said it was lowering retail prices of diesel fuel and gasoline by 135-140 yuan (U.S. $20.51-$21.27) per ton on the same day.

It was unclear whether the break for consumers took place under the old policy or as an exception to the new one, but it suggested that the government was responding to public pressure, despite the environmental concerns.

Just as curious was the impact on the oil companies, which might have been expected to benefit from a boost in their stock prices after a prolonged slump.

Instead, shares of PetroChina and Sinopec dropped sharply in Hong Kong after analysts cited the NDRC's plan to channel profits from the pricing policy into a fund to promote conservation and fuel quality, Bloomberg News said.

The combination of mixed motives and mixed messages left the effectiveness of the new policy in doubt.

Despite the questions, China energy expert Philip Andrews-Speed at the National University of Singapore said the two motives of conservation and aiding the oil companies are "equally important."

"A few years ago, they increased the consumer tax on oil products," Andrews-Speed said in an email message. "The current low prices allow them to do this again, but that takes time to approve."

"Instead, they can bring in an immediate floor to constrain the rise in consumption and pollution," he said, adding that the move will provide some help to the oil companies, which are "in seriously bad shape."

On Jan. 25, the website reported that the Ministry of Finance and the State Administration of Taxation are studying a plan to boost the fuel consumption tax, Bloomberg said.

China raised fuel consumption taxes sharply in 2009. In 2014, the government imposed a smaller increase, offsetting lower crude costs and leaving retail fuel prices unchanged.

In announcing the 2014 tax hike, the Ministry of Finance also cited pollution concerns.

Sign of difficulties

While the latest dual-purpose rule may raise doubts about the result, it may also be a sign of the difficulties in building consensus for policy making on energy with the many constituencies that must be appeased.

Analysts have argued for years that the government should get out of the price-setting business altogether and allow market forces to sort out supply and demand.

The new rule is the third version of price-setting for fuels since 2009. Each was designed as a compromise between market pricing and government control after years of rigidly fixed rates led to chronic shortages and consumer complaints.

China Daily quoted NDRC Chairman Xu Shaoshi as saying that the country will have "complete market-based oil pricing" by the end of the 13th Five-Year Plan in 2020.

But if oil stays below U.S. $40 per barrel for a long time, China's new floor may have effectively saddled consumers with fixed prices again.

The revision is the second new energy regulation that has raised questions about policy making and environmental impacts in as many months.

In December, the State Council, or cabinet, announced a price cut for coal-fired power, claiming that lower rates would both "reduce the burden on enterprises and cut emissions," according to Xinhua.

Under the complicated plan, the reduction that took effect on Jan. 1 primarily affects prices paid to power companies by the State Grid rather than consumer rates.

The "saved funds" will help pay for upgrading coal-fired power plants to meet emissions standards and increase renewable energy supplies, while a portion would be used to lower rates for businesses, the State Council indicated.


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