— Adjustments of product oil pricing mechanism
The reform will be the latest of a series of adjustments China has made in the past several years to marketize its product oil pricing mechanism.
Compared with natural gas and electricity, China’s product oil pricing reform is a front runner. The government launched an initiative at the end of 2008 to reform the pricing mechanism of refined oil products, which aimed to make the market play a bigger role in deciding product oil prices.
The reform was amid a shortage of product oil supply in China. The new mechanism, which pegged domestic product oil prices more closely with international crude oil prices, boosted oil refiners’ performance and increased product oil supply in the country.
However, the pricing mechanism was criticized for its lack of transparency, especially after international crude oil prices climbed to the high level over the years.
To improve the product oil pricing mechanism, China made several adjustments in March 2013, shortening the adjustment cycle to 10 working days and lowering the price-change trigger to 50 yuan per tonne.

— Time for further reform
Under the current product oil pricing mechanism, prices of refined oil products are still controlled by the government. Experts point out that the time is ripe for further reform.
China’s oil refining capacity expanded fast during the 12th Five-year Plan period (2011-2015), which resulted in the abundant and sometimes excessive supply of refined oil. China should change the produce oil pricing mechanism along with the change in the market, said Yao Daming, a member of the Guangdong Oil and Gas Association.
Prices of refined oil in China are expected to remain at a low level as the international crude oil supply continues to grow while demand growth is likely to be limited. Low crude prices will be beneficial for Chinese refiners looking to turn around and for further reform of China’s product oil pricing mechanism, according to Lin Boqiang, an energy expert with Xiamen University.

— Concern over monopoly
China’s product oil market is highly monopolized. China’s two largest oil refiners, PetroChina (PTR.NYSE; 00857.HK; 601857.SH) and Sinopec Corp. (SNP.NYSE; 00386.HK; 600028.SH), produce over 80 percent of China’s total product oil output.
According to the two companies’ interim reports, PetroChina produced 46.475 million tonnes of gasoline, diesel and kerosene, and Sinopec Corp.’s output stood at 74.75 million tonnes in the first half of the year. Their combined output accounted for 81.6 percent of China’s total output of refined oil during the period.
Many analysts are concerned that if the pricing of refined oil is fully marketized, the two refining giants will have a decisive say.
China needs a systematic reform in order to achieve the real marketization of the product oil pricing mechanism, said Lin.
Yao said the government should open the upstream of the oil and gas sector as well oil pipelines to private firms and improve oil futures and spot trade so that market players can have an opportunity to compete fairly. Enditem