China Cuts Fuel Prices as Demand Wanes

An analysis by Michael Lelyveld
china-fuel-april-2013.jpg A worker refuels a car at a gas station in Haikou, Hainan province, April 24, 2013.

China has cut retail fuel prices for the second time in a month, hoping that less market control will help boost the economy.

On April 24, the National Development and Reform Commission (NDRC) said it would reduce pump prices by about 6 percent under new rules that allow more frequent adjustments when imported oil costs change.

Under the new price control formula, the government can shift retail prices to track swings in international oil costs after 10 working days, instead of the 22-day period under previous rules in place since 2009.

The new system is seen as a compromise between full decontrol of the market and fixed prices that failed to reflect real energy costs.

The middle course reflects concern about the high cost of energy subsidies on the one hand and worry about abandoning the safety of price controls on the other.

"They have talked about and I think really believe in the need to move to market pricing or more flexible pricing," said Mikkal Herberg, research director for energy security at the Seattle-based National Bureau of Asian Research. "Gradually, they're beginning to do that."

Lower prices

The latest change has lowered prices for gasoline by 0.29 yuan per liter (U.S. $0.17 per gallon) with a slightly bigger break for diesel fuel.

The NDRC previously reduced prices on March 27 after raising them on Feb. 25 under the old 22-day adjustment rule.

So far, China's state-owned oil companies have reason to cheer the new system after years of suffering losses from selling fuel at inflexible set prices.

China Petroleum & Chemical Corp, or Sinopec, turned a profit on crude processing in the first quarter for the first time since 2011, Bloomberg News said.

The company posted an operating profit from refining of 2.2 billion yuan (U.S. $357 million) compared with a loss of 9.2 billion yuan (U.S. $1.5 billion) a year before.

The PetroChina unit of China National Petroleum Corp. (CNPC) also narrowed its loss on refining during the period to 1.56 billion yuan (U.S. $253 million) from 8.84 billion yuan (U.S. $1.4 billion) a year earlier, Bloomberg said.

Faster adjustments

The improvements highlight the benefits of shorter time frames for adjustments, even when retail prices fall.

Under the old system, regulators were often reluctant to approve any fuel price hikes for fear of risking social unrest when oil costs rose, saddling state companies with losses for months.

The system also led to hoarding, fuel shortages and waste, as traders played the market, hoping prices would be raised eventually.

Under the new system, the oil companies may only have 10 days to wait for price changes if their crude costs increase, and they also have 10 days to profit when oil costs fall.

Lacking transparency

The NDRC's willingness to raise prices under the new system has yet to be tested, however.

Herberg said the government is trying to get consumers, taxi drivers and truck operators accustomed to the idea that functioning energy markets can drive prices up as well as down.

"They want people to start getting used to that process, and the best time to do it is when prices are coming down a bit and giving people a little more flexibility," Herberg said.

But the pricing mechanism still lacks transparency, so that consumers are uncertain about what to expect.

Oil companies can calculate when price changes are due by following international oil costs in the basket of crudes that the NDRC uses as a basis for adjustment. Motorists are more likely to be surprised if prices go up.

Weak oil market

Regulators may also be taking advantage of China's weak oil market as they time the introduction of price changes.

After years of great gains, the slowdown of the country's economic expansion has taken a toll on oil demand growth.

In March, China's apparent oil demand rose only 1.9 percent from a year earlier and fell 4.2 percent from February to 9.7 million barrels per day, Platts energy news service said.

Oil imports in the first quarter dropped 2.3 percent to 5.6 million barrels per day, according to General Administration of Customs data.

The oil figures are the latest in a string of energy results that reflect economic cooling with official growth for the first quarter of 7.7 percent.

Herberg said weakness in demand for oil, coal and power is a sign that heavy industry has been hit by the economic slowdown.

"The Chinese economy is heavily weighted toward energy intensive industries like glass, petrochemicals, steel, aluminum, and cement," said Herberg.

"It doesn't surprise me that energy demand has come off in a hyper-cyclical way," he said.'

Economic stimulus

There were also suggestions that the government may see price cuts for fuel as a way to provide stimulus to the economy.

The lower prices will reduce overall costs for the transport sector by 3.1 percent and save 2.1 percent of costs in the logistics sector, the official Xinhua news agency reported, citing the energy consulting website

So far, the government has resisted a new round of major stimulus spending, which would spur heavy industry and energy demand.

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