China Charts Fuel Reforms

After years of delay, China plans a partial reform of its fuel price system.
By Michael Lelyveld
2008-12-16
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BOSTON--China's government is taking advantage of low oil prices to push long-stalled reforms, but it is unclear how the plan will work if prices start climbing again, experts say.

Under the scheme announced by the National Development and Reform Commission (NDRC) on Dec. 5, drivers would pay higher consumption taxes for gasoline and diesel fuel, but they would save on tolls and other charges.

Officials have promised that pump prices will not rise when the system goes into effect on Jan. 1. Prices could actually "go down a bit," said Xu Kunlin, deputy director of the NDRC's pricing department, the official Xinhua news agency reported.

China has been considering reforms of its fuel pricing system for years amid concerns that rigid price controls do more harm than good.

While Western countries allow fuel prices to fluctuate with market conditions, China keeps retail prices fixed to protect consumers against rising costs. But world oil prices have fallen over 70 percent since July, according to U.S. Department of Energy data.

The steep drop has left Chinese consumers paying twice as much for gasoline as drivers in the United States because China has not adjusted its fixed prices since last June when oil costs were high.

In addition to costing consumers money, China's system of fixed prices has encouraged energy waste by interfering with market forces of supply and demand. The system frequently leads to fuel shortages whenever the government orders state-owned refiners to sell at a loss.

Prices may vary

The NDRC believes its reforms will fix these problems.

Starting in January, the government will allow fuel prices to vary with production costs and market conditions, although it will keep "an appropriate control" over increases, Xinhua said.

"We will adjust the oil price regime in line with certain social groups' ability to bear the burden and to promote energy saving as well as environment protection," the NDRC said in a joint statement with other agencies. The plan was open for public comment until Dec. 12.

The draft plan would raise fuel taxes fivefold from 0.2 yuan to 1 yuan per liter (11 to 55 cents per gallon) for gasoline and from 0.1 to 0.8 yuan per liter for diesel. The higher taxes would fund highway projects, allowing the government to cancel six types of fees, including tolls on most major roads.

Officials are also promising refiners a guaranteed profit margin on fuel, The Wall Street Journal reported. Refiners have reaped high profits during the past six months, but they have lost heavily on sales for most of the past three years, forcing the government to pay huge subsidies.

In interviews with Radio Free Asia, experts said the complex plan may benefit all parties when world oil prices are falling, as they are now. How it will work with higher prices remains to be seen.

Philip Andrews-Speed, a China energy expert at Scotland's University of Dundee, said the government has been considering a system based on variable prices and higher fuel taxes since 1994. But the decision to implement this system becomes more difficult when prices rise.

"If they're going to do it, now is the time to do it, given that they missed the opportunity in the 1990s," Andrews-Speed said. "The window of opportunity may be a few weeks or a few months, who knows?"

Plan falls short

Analysts say that China's plan stops short of a full market system, leaving the door open for the government to intervene if oil prices begin soaring again. Even if prices remain steady, the plan may present problems if it guarantees profits to suppliers.

"The problem of the profit margin to refiners is a very difficult one," said Andrews-Speed. "To offer this for a long period of time could get expensive, and it's a very bad commercial incentive for these companies."

By promising to lower pump prices at the outset, China will also be encouraging more fuel consumption despite the government's goal of increasing energy efficiency and cutting pollution.

Andrews-Speed said these effects depend on how much the government will cut fuel prices to sell the tax plan to the public.

"It's a matter of proportion. If the pump price goes down just five percent, that's clearly a political gesture," he said. "If they add the tax and the pump price goes down 30 or 40 percent, then that is really going against all they've been saying in the last four years about energy conservation, and I think that would be disappointing."

Robert Ebel, senior adviser to the energy and national security program at the Center for Strategic and International Studies in Washington, said the plan tries to promise all things to all people. Any reduction in state controls would remain politically difficult, he said.

"I would think this is what politicians try to do, to keep everybody happy."

But Ebel added it is unclear how soon the government might step in to control prices or cut refiners' profits if oil costs rise to high levels again.

"They've always been behind the times with regard to the oil price," Ebel said. "So are they going to be ahead of it next year, or are they still going to be behind it?"

In the end, he said, the political pressures to control prices may be the same if the government fails to adopt full market reforms. Energy efficiency would also be lost if drivers take advantage of lower fuel prices to increase consumption.

"You're stimulating demand," said Ebel. "Price is a great incentive," he said.

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