- Fuel price won't be adjusted as long as crude is below $40
- Profits to promote conservation, pollution reduction, security
For consumers in China, the benefit of oil’s crash stops at $40 a barrel.
That’s because the retail price of fuels such as gasoline won’t be cut in line with crude as long as it trades below that level, according to the country’s top economic planner. The policy is aimed at curbing consumption, cutting pollution and securing supply, the National Development and Reform Commission said when it unveiled the plan last week.
Retail fuel prices across China are regularly adjusted to reflect crude’s fluctuations. While this mechanism is officially still in place, the government of President Xi Jinping has suspended further cuts. Here’s a look at the impact inside the world’s second-biggest oil user while Brent, a global benchmark, has already fallen below $30:
1. The People
“One thing is for sure, consumers are the biggest losers,” Li Li, an analyst with ICIS-China, a Shanghai-based commodities researcher said by phone. “They are basically subsidizing oil companies.”
Even before the new price floor, Chinese consumers were already missing out on some of benefits of cheaper fuel from crude’s collapse. The country began raising consumption taxes in late 2014, meaning prices at the pump haven’t fallen as fast as oil.
Retail gasoline in Beijing has dropped about 30 percent since the current pricing mechanism was put in place March 2013. Meanwhile, motorists in the U.S. have seen the average price fall by almost 50 percent. Crude oil has slumped more than 70 percent over that period and was trading at $29.89 a barrel at 12:21 p.m. in London on the ICE Futures Europe exchange. Even if oil goes lower from here, drivers in China wouldn’t notice.
2. The Refiners
The profit from selling fuel to consumers at a fixed price as the cost of the raw material tumbles will be funneled into a fund to promote energy conservation, reduce pollution, improve fuel quality and ensure oil supply security, according to the NDRC. That means the country’s refiners, including China Petroleum & Chemical Corp., the largest in Asia, and PetroChina Co., may fail to benefit.
“While the headline news looks very positive, we believe the majority of the extra profit will be taken by the government,” Morgan Stanley analysts including Andy Meng said in a research report Jan. 14. “Refiners are only likely to see minor positives.”
The existing fuel consumption taxes are included in the official product prices, and those revenues are collected from the refiners by the government, according to Lu Wang, an analyst at Bloomberg Intelligence in Hong Kong. There’s no clarity yet on whether a similar system will be set up for the new fund, Wang said.
“It’s likely that refiners can use part of the fund to upgrade refinery plants and supply higher quality and cleaner fuels to pare air pollution,” Wang said
3. The Producers
The NDRC said the floor is also designed in part to shield oil drillers and producers from the global price collapse. The average cost of oil production globally is about $40, where China has built the price floor, the NDRC said. Costs are slightly higher in China because of the generally lower quality of the country’s oil resources, NDRC said.
The country produced about 4.3 million barrels a day in the first 11 months of last year, up 2 percent from the same period the year before. Output in November fell 0.5 percent, the first decline since April 2014.
“Although a lower crude price largely benefits the Chinese economy, it would damage domestic oil producers’ ability to maintain relatively stable domestic production,” Moody’s Investors Service said in a Jan. 18 report.