Sichuan DKT Energy Technology Co., Ltd.( A subsidiary of Hydrexia (China))

　　According to International Energy News, “The Oil Price Management Measures promulgated in May 2009 were only intended as a trial implementation, which in itself indicates that the measures are still imperfect. After more than a year of trial operation, we have identified numerous issues, and there is indeed room for further refinement in the specific operational aspects of the refined oil pricing mechanism,” a National Development and Reform Commission official told reporters on August 26.

　　Recently, although domestic refined-oil prices have met the criteria for a reduction, no adjustment has yet been made, plunging the country’s refined-oil pricing mechanism into a “dormant phase.” This has sparked widespread debate within the industry over whether the new refined-oil pricing mechanism is still in effect.

　　This statement by the National Development and Reform Commission, however, confirms that the current refined-oil pricing mechanism is on the verge of being revised.

　　The aforementioned NDRC official also disclosed that the NDRC will make several minor adjustments to the domestic refined oil pricing mechanism, including whether the 22-working-day cycle is too long. “The overall direction of the revision is to make the mechanism more flexible and better able to reflect changes in market conditions and enterprise costs.”

　　“Fuzzy” pricing mechanism

　　“The National Development and Reform Commission has its own regulations: when two conditions—22 days and a 4% change—are met, fuel prices are supposed to be adjusted. Yet in practice, even when these conditions are satisfied, prices often remain unchanged, leaving us completely baffled,” said the manager of a gas station in Shenzhen to a reporter.

　　In May 2009, the National Development and Reform Commission promulgated the Provisional Measures for the Administration of Oil Prices, which came to be known as China’s new refined-oil pricing mechanism. According to these Measures, when the 22-working-day moving average of the average prices of crude oil from three benchmark markets on the international market changes by more than 4%, the Price Department of the NDRC is authorized to adjust the prices of refined petroleum products such as gasoline, diesel, and aviation kerosene accordingly.

　　In fact, in the initial period following the release of the measures, the National Development and Reform Commission did, in accordance with the regulations, adjust oil prices relatively promptly. However, after a while, this price-adjustment mechanism began to lose its clarity.

　　Taking the recent period as an example, since the National Development and Reform Commission lowered the maximum retail price cap for refined oil products on June 1 of this year, the maximum retail prices have remained stable for nearly three months.

　　During this period, the failure to adjust the maximum retail prices of refined oil products domestically was not due to the failure to meet the NDRC’s price-adjustment criteria.

　　In fact, at the end of July this year, both of the conditions for lowering refined oil prices were briefly met, prompting widespread public speculation that the window for a price adjustment had opened. However, rather than adjusting refined oil prices, the National Development and Reform Commission publicly stated that the conditions for a price cut had not yet been satisfied.

　　This “fuzzy” approach has led some industry insiders to question whether the new refined-oil pricing mechanism has, in effect, become a mere formality.

　　In addition, since the introduction of the new pricing mechanism, numerous ambiguous provisions have persisted. Under the new refined-oil pricing mechanism, when international crude-oil prices exceed US$80 per barrel, the refining margin begins to be reduced, with the final refined-oil price calculated on the basis of zero refining profit; and when prices rise above US$130 per barrel, appropriate fiscal and tax policies are implemented to balance the interests of producers and consumers while ensuring the production and supply of refined oil, with gasoline and diesel prices generally remaining unchanged or increasing only modestly.

　　Dilemma

　　The NDRC’s ambiguous approach has led many members of the public to accuse it of “chasing price increases while ignoring price declines, thereby safeguarding the monopolistic interests of oil companies.” Meanwhile, oil companies themselves have also expressed considerable dissatisfaction with the current pricing mechanism.

　　At Sinopec’s interim results press conference on August 23, Wang Xinhua, the company’s CFO, publicly stated, “The National Development and Reform Commission is currently reviewing the refined oil pricing mechanism that has been in place for more than a year, and we believe…”