China's top economic planning body is determined to reform its oil pricing system in order to make it more flexible, and more acceptable to both consumers and refineries, according to media reports.

The Oriental Morning Post quoted an industry insider as saying that the National Development and Reform Commission (NDRC) was to delink the price peg between local processed oil products and oil products in three major markets of Singapore, Rotterdam and New York.

Instead, the authority is planning to link local processed oil products to Brent, Dubai and Minas crude.

Eventually domestic oil products will be priced based on the average price of international crude, plus cost and adequate profit following refining, tariffs and logistics.

China has set the price of processed oil products in line with the average price of oil products in Singapore, Rotterdam and New York markets for five years. As the government only adjusts the oil price when the international price changes substantially (beyond 8 per cent), end consumers often find the final oil price sluggish and easy to speculate.
"The peg switch from oil products to crude oil is really a breakthrough in the local oil pricing mechanismThe new pricing mechanism will be available for public review before December 11," the anonymous insider revealed to Oriental Morning Post.

A senior analyst with China National Petroleum Corp (CNPC) told China Daily that if the reported switch was true, it would turn out to be a more scientific pricing mechanism than the current one.

"A mechanism based on international crude oil price, instead of oil product price, will more accurately reflect supply and demand, and will prove to be subject to less vicious market speculation," he said.

The CNPC analyst, who asked not to be named, said the time is right for the Chinese Government to further reform its oil pricing mechanism to better reflect global oil supply and demand.

The analyst said this is because when the price gap between global and domestic crude oil is not too big, local consumers will find a mechanism backed by international prices more acceptable.

More importantly, the new pricing mechanism will potentially relieve pressure on loss-making local refineries, according to Cao Xiaoxi, chief engineer of Sinopec Economic and Development Research Institute.

"For major local refineries, such as Sinopec, a more agile pricing mechanism will help them reduce losses and eventually make them profitable," Cao said.

Due to soaring international oil prices, China's oil exploration and production business is hugely profitable. But the refining sector is suffering huge losses as the existing pricing mechanism is rigid in terms of adjusting the local oil price.

Although the NDRC has raised the price for processed oil products nine times since July 2003, it is still lower than the international level.

To fend off supply fluctuations and inflation, the government keeps a tight grip on the price of major oil products and keeps it below the global level. The NDRC raised the domestic oil price twice in March and May, in response to soaring global price.

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