It is true that the new mechanism is a more accurate and efficient means of reflecting global oil supply and demand. Chinese refiners' deficits arising from high crude imports and low prices on local oil products can probably be reduced if the new system is implemented.

However, people cannot help asking how the authority can objectively determine the "cost and adequate profit of refineries".

Costs for different refiners located in different regions may vary substantially. Moreover, what would be a reasonable profit margin for both oil refiners and consumers to accept is a hard nut for the NDRC to crack.

Sinopec confirmed that the authority raised the local refined oil price twice last year using the new pricing system to relieve Sinopec's refining deficits. But the top Asian refiner still had to depend on 5 billion yuan in compensation from the State to cover its refining deficit.

A fully market-set oil pricing mechanism will not and should not be available in China in the foreseeable future, based on the fact that the oil product wholesale business is still State-controlled and dominated by a few State-owned giants.

(China Daily 02/01/2007 page13)

1

2

(For more biz stories, please visit Industry Updates)