China Adjusts Oil Price Mechanism

China will adjust the prices of oil products every 10 working days to better reflect changes in the global oil market, the National Development and Reform Commission (NDRC) announced on Tuesday.

Previously, domestic fuel prices were adjusted when prices for Brent, Dubai and Cinta crude changed by more than 4 percent over 22 working days.

The new pricing system also cancels the 4-percent floating band for oil price changes and adjusts the varieties of crude used to calculate the price changes for domestic oil products, the commission said at a press conference.

Domestic prices will be kept unchanged if price changes in international oil markets are less than 50 yuan per tonne, according to the NDRC.

The move is part of government efforts to push market-oriented pricing for energy resources.

"The reform marks an important step toward the full marketization of domestic oil product prices," said Wang Zhen, deputy head of the China University of Petroleum's China Energy Strategy Research Institute.

The old mechanism, which was introduced in 2009, has been criticized for failing to reflect oil price changes on the international market.

The commission also announced that it would cut the retail price of gasoline by 310 yuan (49.43 U.S. dollars) per tonne and that of diesel by 300 yuan per tonne starting Wednesday.

The cuts, which were decided according to the old pricing system, will mark the first of their kind for the year following a price rise on Feb. 25.

The benchmark retail price of gasoline will be lowered by 0.23 yuan per liter and that of diesel by 0.26 yuan per liter.

Ten days after the cut, domestic oil products will need to brace for their first price change under the new pricing system, the NDRC said.

"This means that the pricing cycle for domestic oil products will enter a regular phase of semi-monthly changes," said Zhou Dadi, an expert with the China Energy Research Society.

The new mechanism is more responsive to global oil market changes and will help the country to better utilize overseas resources to ensure domestic oil supplies, the NDRC said

However, conditions for the country to liberalize and fully marketize the production, trade and pricing of the oil industry, a more politically sensitive and complex sector, are far from mature, analysts said.

If the country opens the market for oil imports, a phenomenon similar to that experienced by the iron ore sector may occur. Chinese buyers, who consume most of the world's iron ore, have experienced huge price spikes in recent years, as global giants control the sector's pricing rights, said Lin Boqiang, head of the China Center for Energy Economic Research at Xiamen University.

The move is mainly aimed at preventing domestic oil prices from lagging behind changes in international markets, as China buys more than 200 million tonnes of oil each year from global markets, said Lin.

This flaw has been taken advantage of by distributors and consumers, who profit by hoarding oil products when international oil prices register large rises and selling them after government price adjustments, the NDRC said.

Under the new system, domestic oil prices and market changes will be more similar to those in international oil markets, although domestic oil prices won't necessarily be lowered, Wang said.

Domestic oil prices will fall more quickly than before when global oil prices drop, so will they go up in the similarly swift manner, which also means more risk, he added, suggesting the establishment of a subsidy mechanism to protect the public service and agricultural sectors which are more vulnerable to the impact of sharp price rises.

The NDRC said price adjustments under the new system may be suspended, postponed or downsized in special cases, such as sharp rises in domestic inflation, emergencies or dramatic swings in global oil prices.

The government will appraise the operation of the system annually and make changes to improve it when necessary, the NDRC said.