Beijing retreats on fuel price promise

By Kathrin Hille in Beijing and Javier Blas in London
Published: May 9 2009 02:54

China took a step back from its promise to move towards more market-oriented domestic fuel prices, warning on Friday that Beijing would limit petrol, diesel and other fuel price increases when oil costs moved above $80 a barrel.
Oil traders said the long-awaited outline of China’s retail fuel pricing mechanism cast doubts on the actual reform and pointed to more government interference.

China is the world’s second largest oil consumer and its domestic retail fuel price policy affects global oil prices because the country keeps domestic bills artificially low. The International Energy Agency, the developed countries oil watchdog, has pressed Beijing to liberalise its domestic prices to rein in consumption.
The national development and reform commission, China’s main economic policymaking body, said retail fuel prices would move relatively freely while global crude prices remained below $80 a barrel. In those circumstances, Chinese refineries would profit from distilling crude into fuels with a “normal” refining margin.
Above $80 a barrel and up to $130 a barrel, domestic prices would also move, but Chinese refineries would not make a profit. The authorities said that above $130 a barrel they would would guarantee supplies of retail fuels through “tax measures”, probably supporting refineries with tax rebates, but added that “petrol and diesel prices will in principle not be raised or not be raised much”.
Beijing pledged in November to allow prices of refined oil to “reflect fluctuations of international oil prices” from the start of this year. It had also announced a steep rise in petrol and diesel taxes to replace other fees, such as some road tolls.
The new regime replaces a system of periodic adjustments by the government without explanation of the underlying rationale. But traders in New York and London suggested it was a step backwards rather than the promised liberalisation.
The system also fails to explain how changes in global crude prices would be calculated. Under new rules, the two state-owned refiners can adjust retail prices if global crude oil prices change more than 4 per cent from their moving average over 22 days. However, they did not indicate what variety of crude oil the authorities would track, nor how the refineries would be compensated above $130 a barrel.
Copyright The Financial Times Limited 2009