China cuts oil prices after new pricing mechanism kicks in

(Xinhua)
Updated: 2009-01-14 18:01

BEIJING - China said Wednesday it would cut its benchmark retailing gasoline and diesel prices by two percent and 3.2 percent, respectively, as of midnight Wednesday, the first cut since its new pricing mechanism for processed oil took effect as of January 1, 2009.

A Sinopec filling station is seen in this file photo. China said Wednesday it would cut its benchmark retailing gasoline and diesel prices by two percent and 3.2 percent, respectively, as of midnight Wednesday, the first cut since its new pricing mechanism for processed oil took effect as of January 1, 2009. [Sohu.com]

The gasoline price will be reduced by 140 yuan ($20.5) a metric ton and diesel by 160 yuan a ton starting tomorrow, the National Development and Reform Commission said in a statement on its website.

It's the second cut in a month after the government lowered the prices from December 19.

After the cuts, the price of gasoline will stand at 5,440 yuan per ton, a decrease of 140 yuan per ton, while that of diesel will drop to 4,810 yuan from 4,970 yuan.

Xu Kuning, deputy director of the pricing department of NDRC, said the latest cuts were made to reflect declines in global crude prices.

"There is still room for a further cut in domestic oil prices despite recent fluctuations in global prices," Xu said.

Prices are down more than 70 percent from a mid-July peak of 147 U.S. dollars a barrel and are continuing to fall overall despite a short-lived recovery following tension in the Middle East and disputes over natural gas between Russia and Ukraine.

Crude prices settled at 37.78 U.S. dollars a barrel Tuesday on the New York Mercantile Exchange. The price was about 40 U.S. dollars a barrel when China last cut domestic prices in December.

The more frequent cuts in fuel prices also came amid a series of government measures to bolster the economy, which expanded 9 percent in the third quarter, the slowest pace in five years.

NDRC's Xu said lower prices would alleviate burdens on oil consumers, individuals and enterprises alike, and would also have a "positive effect" on the growth of the auto industry.

China also approved Wednesday a set of tax cuts and subsidies for the auto industry to boost auto purchases and pledged more support for the steel sector, the latest move to stimulate the slowing economy.

Zhou Dadi, a researcher with the Energy Research Institute of NDRC, said the latest cuts would drive pump prices down by more than 0.1 yuan, according to his calculation.

Qian Zhaoming, a taxi driver in Nanjing, said he would be able to save one to two hundred yuan a month after the cut, although the margin of the cut was not very big.

Government-set fuel prices are traditionally changed infrequently. As a result, Chinese drivers were paying much more than those in many other countries before the cut last month.

"The second cut will have an obvious impact on corporate earnings," said an unidentified official of China Petroleum and Chemical Corporation.

"But the new pricing mechanism will benefit the refining sector in the long run," said the official of Asia's largest refiner.

Zhou, the NDRC researcher, described the latest cuts as "a good sign."

"It means that domestic oil prices will react more quickly to changes on the global markets in the future," he said.

The latest cuts were also the first since the new pricing mechanism for refined oil products took effect on January 1, 2009.

Previously, China's refiners had suffered huge losses because of a gap between government-set domestic retail prices and global crude prices when global prices soared.

Under the new pricing mechanism, China's domestic prices are "indirectly linked" to global crude prices "in a controlled manner".

NDRC's Xu said the "indirect link" would be based upon the average global crude prices, while also taking into account domestic production costs, taxation, and "appropriate profits" of oil producers.

Xu explained that the country would move to adjust domestic prices when changes in prices of relevant oil products on the global market "within a certain period" went beyond "a certain level".