Oil’s dive gives China an opening to free fuel prices

Plunging crude oil prices are presenting China with an opportunity to end state controls over retail fuel pricing.

Fearful of slowing growth, China has pledged to give markets a decisive role in its economy. The drop in oil costs will be a test whether the country will follow through on Premier Li Keqiang’s promise by giving PetroChina Co. and China Petroleum & Chemical Corp., or Sinopec, the freedom to set prices.

The companies are mandated by the state to keep retail fuel prices low. As in India and Malaysia, where governments have ended price controls, that dynamic has now changed with the slide in oil. The move will represent a longer-term gain for China’s oil producers and refiners, even as they contend with the immediate pain of lower prices eroding the value of their production and inventories.

“Key reform like this cannot happen during high crude prices, as the government has a duty to keep inflation in check,” said Lin Boqiang, an adviser at the nation’s top economic planning agency. “A lower price environment provides the opportunity to make the whole pricing mechanism independent and transparent.”

That agency, China’s National Development and Reform Commission, currently reviews international crude markets every 10 days to decide domestic prices of fuels such as diesel and gasoline. Even when crude surged, the commission refused to raise retail prices for fear of stoking inflation, crimping profits for refiners such as Sinopec and PetroChina.

“Handing pricing to the market will take away the uncertainty for oil companies, who would change retail prices more swiftly according to crude price swings and effectively pass the cost burden to end customers,” said Han Xuegong, a business administration professor at Beijing’s China University of Petroleum. “It’s also a step forward in China’s market-based reforms.”

Brent, the benchmark for more than half of the world’s crude trade, has dropped 37 percent this year to below $65 a barrel, the lowest in more than five years. Its decline has accelerated after the Organization of the Petroleum Exporting Countries last month maintained output in the face of a glut.

China could give the job of deciding prices to an independent organization, leaving the national commission in a supervisory role, said Lin, who is also a director at the Xiamen University’s Energy Economics Research Center.

India’s new Prime Minister Narendra Modi, who took power in May, abolished more than 10 years of diesel-price controls in October. A month later, Malaysia announced the end of gasoline and diesel subsidies.

“The obvious benefit is oil producers can transmit cost pressure to the market in a way that consumers and investors can understand and accept,” Han said. “In a fair pricing system, people understand that what you pay at the pump is decided by crude oil prices, not by gas station operators.”

From an earnings perspective, the falling price of crude will be brutal for China’s oil companies.

PetroChina, the country’s largest oil company, posted its lowest profit in eight quarters in the three months to October. Cnooc Ltd., the nation’s biggest offshore oil and gas producer, reported a 4.6 percent decline in sales over the period, compared with a year ago. If crude continues to languish, worse will follow.

Sinopec and PetroChina’s Beijing-based spokesmen didn’t answer calls to their offices seeking comment. A Cnooc spokesman said the company doesn’t comment on speculation. Li Puming, the National Development and Reform Commission’s Beijingbased spokesman, didn’t answer two calls to his office seeking comment.