China will not cut domestic retail fuel prices when international oil prices fall below US$40 a barrel, the countrys planning agency said earlier this month.
Chinas new pricing mechanism for refined oil products was unveiled by the National Development and Reform Commission (NDRC) on January 13 and became effective immediately. It sets the crude oil price of US$40 per barrel as the minimum level that Chinas oil refiners use to price their refined petroleum products.
The limits are aimed at curbing pollution and countering the negative effects of major fluctuations in international oil prices, the National Development and Reform Commission said. The thinking behind the government policy is that overly low fuel prices would boost gasoline and diesel fuel demand unnecessarily, which could worsen the countrys pollution problem. The policy is in line with the NDRCs previous practice of allowing refiners to charge higher prices on their fuel after upgrading their facilities to produce higher quality fuels.
The current pricing system introduced in 2013 changes Chinas oil prices every two weeks based on global crude oil prices. However, as the global oil market continues to decline, the old system requires more market-oriented adaptations.
Profits from fuel sales below the US$40 level will go to a fund to promote energy conservation and security and improve fuel quality, the NDRC said. Funds in this reserve may be used for energy conservation, emission reduction, refined oil products upgrade and security of oil supply (i.e., oil reserves).
The NDRC announcement did not clearly state how the risk reserve would be distributed nor who the beneficiaries of these disbursements would be. However, it is likely that national oil companies (NOCs) will be among the chief beneficiaries of this fund, given the large investments they undertake in the areas identified in the announcement.
Previously, it set a ceiling for prices, which will not be raised if international oil prices rise above US$130 a barrel.
