Article
- Wu Libo, Executive Director, the Center for the Energy Economics and Strategy Studies at Fudan University
It's been over a month since the controversial fuel tax reform took effect on January 1. In addition to the new move, a fuel pricing mechanism was also set. For car owners, the new system for pricing petrol plays an increasingly important role in their future fuel consumption.
After China decided to cut its benchmark retail gas and diesel prices, oil giants began an intense competition by lowering prices in big cities. In early February, Shanghai had the lowest gas price in China. Take 93-octane gasoline for example, its price stood at 4.66 Yuan per liter the lowest among prices in Shanghai. Compared with the price of gas before the pricing war, it fell by about 23%. How can we make sense of the current fluctuating fuel prices? How much will the new fuel pricing mechanism impact China's energy conservation?
To discuss these issues, we caught up with Wu Libo, executive director of the Center for Energy Economics and Strategy Studies at Fudan University.
Wu Libo is an expert on the international petroleum market and energy related environmental issues. She is the executive director of the Center for Energy Economics and Strategies Studies at Fudan University. She has consulted for the Shanghai Government and National Development and Reform Commission by writing a report on recycling economy and energy conservation.
Why are China’s fuel prices higher than the US?
P: Professor Wu, thank you very much for joining us on the Main Talk.
W: Nice to meet you.
P: Nice meeting you. Thank you. As we’ve seen from the clips earlier that we’ve been under the impression that Chinese fuel economy is somehow insulated from the fluctuations in the crude oil market internationally. And now all of a sudden, we are beginning to have this talk about price war, are we really seeing a move from the old command and control economy to a more market economy in the Chinese fuel economy here?
W: Yes, actually, the recent price war is really pervasive and noticeable. As we know that, since the early of 2009, the whole taxation system and the pricing mechanism has been reformed in China. So under such kind of new system, the minimum price control has been eliminated. This means that any company who wants to extend his market share can use the tool of lower price to compete with other companies. When their supply is sufficient, which means that the market can become more competitive. For the maximum price, also has been lowered. In the former system, the company can increase the price by 8%, now lowered to 4%. So this means that the monopoly power in the market has been weakened.
P: For a very long time, the Chinese industry has seen this cushion, has been cushioned by state regulations of fluctuations in the international oil pricing. Why the sudden release of the control now at this point?
W: During the 2003 until the middle of 2008, the world crude oil price almost increased by 4 times. But if we look at the local market, the gasoline price only doubled. So what’s the meaning of this? It means that the government provided a great amount of subsidies to the petroleum industry. It’s unfair totally. Why? Because such kind of subsidy means wealth is transferred from the public wealth to certain sectors.
P: Now let me get it right here, you are saying the subsidy; it’s from the government to the big petroleum companies, retail companies, i.e. Sinopec and Petrol China, but isn’t it true also that small industries and all sorts of businesses, including us, the car users also benefited from the cheap retail gasoline prices?
W: That’s true. But, how about others, how about other sectors, how about the poor population, they get nothing from this, so it’s unfair, so such kind of subsidy not only means wealth transfer from one department to another department, it means a kind of wealth transfer from one populous group to another. And also because now, as we know that, the crude oil price has decreased to a very low point. It’s also very good timing, because not only Chinese economy, but also that the whole world economy has been slowed down, so it means that even though you release the, you do the deregulation of the gasoline market. It will not lead to inflation, fluctuation or instability with the price. It’s a very good timing to do that.
P: Even given the current price adjustment coming down from the late 2008 level, we are still paying more in retail gasoline than our neighboring countries, for example, Singapore. And in fact we are still paying more than in the US. Should we or are we eligible to be complaining about relatively high retail prices here in China?
W: Yes, it’s very popular. You always complain why it’s still even higher than US and why. I should remind one point to all of the audience. When you compare the price of the gasoline, you have to know that the gasoline in local market is not equal to the gasoline in the international market. The gasoline in local market should reflect the local supply and demand. For US also, the gasoline price reflects the US supply and demand. For China, we are in the stage of industrialization. It’s kind of tight demand condition at this moment. When the price increases, our domestic market price will increase simultaneously. It’s very natural because you have to import crude oil. When the price decreases, for the local market, if you have enough and sustainable demand, then how can you expect the price fall? It’s unreasonable, right? We try to link two prices together, but it’s not so reasonable.
P: In terms of the pricing mechanism that we have retail oil pricing with the current downward trend for international crude oil prices, are we expecting further price reduction in the retail prices for gasoline and diesel here in China?
W: First of all, I should demonstrate that, according to my own opinion, there are still great uncertainties in the world crude oil market. Like the first month of 2009, the oil price has somehow rebounded and then decreased and increased, fluctuated, which means that, in terms of supply and demand, there are still great uncertainties, so we cannot expect you know such kind of decreasing trend or increasing trend.
P: We can't play a role in making the decisions, but let’s try to understand the decision here. So now we understand with the current near about 5.9 or around 6 RMB per liter of gasoline at retail price, how does it break down between crude oil, between refining, distribution and marketing and taxation?
W: You can never get any information from the CNPC or CPCC that how about their refinery cost? We still can do some very simple calculation. So if we take the gasoline retail price at 4.66 Yuan per liter, than for the access tax almost account for 20% of the total price. And look at the cost of crude oil, in January the average price of crude oil is around 42 dollars per barrel, which means that, the average price of the gasoline in January is around 5440 Yuan per ton, which means that the cost of the crude oil is almost around less than 60%. Like the transportation of the profits almost account for 22%, something like that.