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Gas prices in China are a window into an increasingly contested reform process where organized groups are becoming more adept at defending their interests.
The benchmark price for both crude and refined oil is set by the National Development and Reform Commission (NDRC), China's top economic policymaking body. Severely underpriced in the 1980s, the price of gas in China has steadily increased as the NDRC has adopted pricing mechanisms that more closely reflect global market prices.
However, during oil price shocks, such as in 2004 and 2008, the NDRC has been slow to react with price adjustments. While these delays have ensured relatively stable prices for consumers, they have also led to supply shortages and government outlays to subsidize refiners forced to operate at a loss.
The graph below shows the difference between the price of crude oil imported into China and the price consumers actually pay at the pump. Normally one would expect the difference between the two to be relatively stable, but the graph shows how the government's pricing system can lead to extreme swings.
The next graph shows the absolute difference between crude and retail oil prices in China over the past several years. This amount includes not only the margin for refiners and retailers, but also transportation costs and other various expenses.
In 2009, the NDRC introduced a new policy whereby domestic prices adjust after any change of more than 4% in the global price over a 22 day period. Given the volatility in oil prices, this system has proven unsatisfactory and the NDRC has acknowledged the need to move towards a system that more closely tracks the global price. The move also comes in light of both Sinopec and PetroChina reporting losses on their refining operations during the first half of the year, 12.17 bn rmb and 23.36 bn rmb, respectively.
The NDRC is currently reviewing a new proposal that would lower the requirements for a price adjustment to 2% over a 10 day period.
China's state-owned oil giants appear to be largely on board with the reform. However, a group representing privately-owned oil refiners and retailers, called the Petroleum Circulation Committee, has announced its opposition to any changes to the pricing system.
The reasons for the Committee's opposition appear to be twofold. First, private gas companies claim that the state-owned oil importers refuse to sell them crude oil during price spikes, choosing instead channel oil through their own refining and retail networks. Second, the current state of the oil distribution network and the limited availability of price hedging financial instruments make private refiners extremely vulnerable to price fluctuations.
The Petroleum Circulation Committee was formed in 2006 and made headlines last year when it lobbied the NDRC to reduce corn ethanol production. The Committee is unlikely to stem the tide of reform if both the NDRC and state-owned oil firms decide they want the change, but it's fascinating to see the emergence of more aggressive public lobbying by business groups in China. Overall, private refiners account for a quarter of the country's refining capacity and there are 46,000 privately-owned gas stations.