PRICE PLUNGE AMID ECONOMIC TURMOIL

The turmoil on Wall Street in the wake of the U.S. sub-prime crisis is far from conclusion. Global financial markets tumbled again after the historical "Black Monday" on Sept. 15 when the fourth biggest U.S. investment bank, Lehman Brothers, filed for bankruptcy. Adding to the woes,financial giant Merrill Lynch was taken over by Bank of America, while leading insurer AIG needed an85 billion U.S. dollar bailout from the U.S. government to keep afloat.

This was accompanied by a tumbling price for crude oil. Light, sweet crude for October delivery fell below the 100 U.S. dollars per barrel level to hit 95.71 U.S. dollars on the New York Mercantile Exchange (NYMEX) on Sept. 15, a 35 percent drop from the record 147.27 U.S. dollars of July 11.

"An ebbing world economy and declining demand for crude oil has dragged down the price, while a stronger greenback and weaken speculation also led to the result," said Jiang Xinmin, an expert with the National Development and Reform Commission, the country’s economic regulator.

"Speculators are prone to sell off oil if demand is expected to fall in the future. They will shift to speculate in some other commodities and financial products. This will further help a fading price," he explained.

Professor Dong Xiucheng of the Beijing-based China University of Petroleum said the world's big investment banks were the major speculators and participants in the futures markets. They had contributed much to the surging oil price.

"However, this wave of financial crisis is expected to play the role of an alarm bell, which will warn them to give up excessive and abnormal speculation in crude oil markets in future."

Jiang predicted the price would very likely stay bellow 100 U.S. dollars a barrel for a long period. "Crude prices will come back to reflect the world economic situation."

EASING INFLATION PRESSURE

The "crude oil price fall will help China to tame inflation, which is one of the country's biggest pressures currently," said Tang Min, China Development Research Foundation deputy secretary general.

Because of the booming economic development and severe natural disasters this year, the country's consumer price index (CPI), a main gauge of inflation, rose 7.9 percent in the first half over the same period last year. It hit a 12-year high of 8.7 percent in February.

This nearly doubled the country's target figure. Earlier this year the nation set a goal of limiting CPI to 4.8 percent for 2008.

"China's inflation pressure has grown tougher as the prices of world goods and commodities rose sharply this year amid surging oil prices, because oil is one of the most important raw materials and components of industry," Tang said.

Last year, the nation imported 163 million tonnes of crude, up 12.4 percent over the previous year. This accounted for nearly half of the oil consumed nationwide, according to China Customs figures.

"The country has become more and more reliant on international trade and the world market after it adopted the opening-up policy," Tang said. "This means the rising crude prices would pass onto the domestic industries and consumers easier."

"It's not difficult to understand a falling oil price is passed on to other domestic industrials. It will pull down prices of the whole industrial chain."

Zhao Jinping, an economist with the State Council, the country's Cabinet, added: "Although inflation has been eased a little in recent months, the producer price index (PPI) continues to increase, which indicates the raw material price is still high. Inflation could not be solved at the root if oil prices stay high."

According to National Bureau of Statistics figures, the PPI for the country's industrial products jumped 8 percent in the first seven months over the same period last year.

"The oil industry is the one of the most upstream in the industrial chain," said the NDRC's Jiang. "Enterprises will reduce their business costs greatly when oil prices plunge. This may benefit consumers, tame inflation and boost the economy."

Tang adds, all in all, the country is expected to face less inflationary pressure if the oil price continues to fall.

OIL REFINERS BENEFITED

Industry insiders said China Petrochemical Corp. (Sinopec), Asia's largest oil refiner, could earn profit only if the oil price was below 95 U.S. dollars per barrel. The balance point for PetroChina, the other domestic oil giant, was 88 U.S. dollars.

However, the country's oil companies have been losing money for each barrel of foreign oil they refined and sold to domestic consumers. This was because they couldn't pass on the increase under the government-set refined oil price.

Sinopec saw its first half net profit fall 73.4 percent over the same period last year, dragged down by big losses in its refining sector. The leading refiner confirmed losses of 46 billion yuan (6.72 billion U.S. dollars) in its refining sector, despite receiving government subsidies of 33.4 billion yuan.

"A falling crude price is no doubt good news for domestic oil refiners, whose profits were squeezed by high world oil prices and a relatively lower domestic price," said Zhuang Jian, an Asian Development Bank (ADB) economist.

"Now refiners can buy cheaper crude from overseas markets if the price falls. This will help them to reduce business costs and increase profit fundamentally," he said.

Professor Dong added the effect of the drop varied among the different companies. "For example, Sinopec may benefit from a falling crude price because almost 70 percent of its crude is from overseas. China National Offshore Oil Corp. will probably see reduced profit because its earnings are mainly from the exploration sector."

To solve problems that have resulted from the soaring world crude prices, the government raised the benchmark gas and diesel oil retail prices to 6,980 yuan and 6,520 yuan, respectively, per tonne in June, up more than 16 percent and 18 percent. But it does little to make up for refiners' losses.

Dong points out the rising domestic crude price and providing enterprises with subsidies will not solve the problem fundamentally. "These moves not only add to the government's financial burden, but also lead to a more severe domestic oil shortage. Foreign oil companies prefer to buy cheaper crude from China at a relatively low price."

The ADB's Zhuang adds the surging oil price had obviously put the government in a dilemma.

"On one hand, oil refiners expect the country to lift the refined oil price. On the other hand, it (the government) fears a free refined price may spark severe inflation and harm other downstream industries. In a long-run perspective, the country should adjust the refined pricing mechanism when the world price is relatively low.

"Raising the domestic refined price is not an easy job at present and needs good timing, but a falling world oil price has made the issue easier to realize. China should seek good opportunities to adjust the pricing mechanism."