China's move to lift the prices of processed oil, while setting up a mechanism to offer subsidies to disadvantaged communities and public service sectors, is a necessary part of China's processed oil pricing reform, said experts from foreign institutes on Monday.

 

In a circular made public on Sunday, the National Development and Reform Commission (NDRC), which regulates energy prices, said the producer prices of gasoline will be raised by 300 yuan (US$37.5) per ton while that of diesel oil will go up by 200 yuan per ton.

 

To offset the impact of the price hikes to communities sensitive to higher prices, the commission said China's State Council has decided to launch a mechanism to subsidize some of the communities and public service sectors as well as collect special fees from oil producers who sell domestic produced crude oil.

 

Raising the processed oil price when the gap between international and domestic prices has reached a certain level is good for both improving energy efficiency and reducing the losses of the oil refining industry, said Tang Min, chief economist with Beijing Office of the Asian Development Bank.

 

Tang said that a transparent, open and timely pricing system is a fundamental way of solving current problems in China's processed oil consumption.

 

Tao Dong, chief Asia economist at Credit Suisse First Boston, noted that China does not have abundant petroleum resources, saying only by offering a pricing system that reflects the real value of energy resources can the consumption of energy resources be led onto a proper and efficient road.

 

China's processed oil price is mapped out by the NDRC according to changes in the international market.

 

Despite a higher price of processed oil, Sinopec, China's largest oil refinery, saw its price in China's A share market drop by 2.08 percent to 5.19 yuan per share on Monday.

 

Wang Jing, an analyst with the Orient Securities Company Limited in East China's Shanghai Municipality, said that a lower price rise than expected is one of the major reasons attributed to the drop of Sinopec.

 

Special fees levied on oil producers who sell domestically produced crude oil is another factor affecting the share price of Sinopec, said Wang.

 

Wang estimated that the price rise will lead to an increase of 8.4 billion yuan (US$1.1 billion) in Sinopec's earnings before interest and taxes (EBIT) in the later three quarters of this year.

 

Frank Gong, chief China economist of JP Morgan, said that even after the price rise, China's processed oil price is still at least 20 percent lower than its international counterpart.

 

The pressure on the refining industry still exists, he said.

 

Experts told Xinhua that China should establish a pricing system of processed oil that is directly linked to the international market and reflects the domestic demand and supply situation as well as reducing financial damage.

 

As for the subsidies to disadvantaged communities and public service sectors, Gong said that it is a prelude to China's processed oil pricing system reform.

 

Only by establishing a proper subsidy system can the government make greater steps towards reform, said Gong.

 

According to a senior official with the NDRC, the goal of China's pricing reform is to establish a system reflecting the real situation of the market and caring for interests of all groups.

 

Zhuang Jian, a senior economist of ADB, said that the pricing reform of China's processed oil should be accompanied by the reform on oil producing and selling sectors as well as the establishment of reserves and futures market.

 

Rapid economic growth and a lower inflation rate are both favorable conditions for the pricing system reform of China, said Zhuang.

 

(Xinhua News Agency March 28, 2006)