Market Spotlight: Where Will Domestic Product Oil Prices Go?
Since 2004, the global oil price has remained at a high level, showing no sign of slowing down. In late July, the average price of 11 crude oil baskets monitored by OPEC exceeded $57 per barrel, hitting a historical high. At the same time, New York market crude oil futures prices broke through the $67 mark on August 12th, marking a new record. This sustained increase in international oil prices is expected to have a direct impact on domestic refined oil prices, putting pressure on China’s pricing mechanism.
In 2004, due to strong demand and rising international prices, the average price of China’s petroleum products increased by 9.25% year-on-year. The trend accelerated in 2005, with the average price of major refined oil products—such as gasoline, diesel, and fuel oil—rising by 21% from the start of the year and 20.5% compared to the same period last year. Despite these increases, the domestic refined oil prices in China remain significantly lower than international levels. For example, while global crude oil prices rose by over 28% in 2023, domestic gasoline prices only increased by 15.7%. In the first seven months of this year, international crude oil prices surged by more than 40%, but domestic gasoline and diesel prices rose by just 10% and 13.6%, respectively.
China's current refined oil pricing mechanism is based on the weighted average of prices in Singapore, Rotterdam, and New York. When the price change exceeds 8%, the government adjusts domestic prices accordingly. However, the National Development and Reform Commission (NDRC) also takes into account non-market factors such as social affordability and economic stability, which often leads to delayed or partial adjustments. As a result, the pricing system has become inefficient, leading to situations where wholesale prices are higher than retail prices, and refined oil prices are even lower than crude oil prices.
This misalignment has created several problems, including reduced production incentives for refineries, resource outflows, supply shortages, and opportunities for illegal trading. These issues have made it increasingly urgent to reform the pricing mechanism. Over the past six months, China has made five price adjustments, compared to just three in the previous year, indicating that the pricing system is becoming more responsive to market changes. This shift suggests that reforms are already underway.
From the perspective of oil companies, there is a strong desire for a fully market-oriented pricing mechanism that aligns domestic prices with international levels. However, given the current economic conditions and public affordability, full liberalization remains unrealistic. To address this, the NDRC recently held a special meeting in Beijing to discuss reforms in oil and natural gas pricing. Experts suggest that the reform should follow the principle of “adjustment, tightness, and relaxation,†aiming to create a more timely and market-responsive pricing system that reflects both global trends and domestic supply-demand dynamics.
Looking ahead, the government may need to gradually move from “lagging pricing†to “real-time pricing†to achieve a more balanced and efficient market. Although recent price adjustments have helped ease some pressures, the gap between domestic and international prices remains significant. Currently, the difference between refined oil and crude oil prices stands at around 700 yuan per ton, which has led to losses for domestic refineries and prompted the export of refined products, further straining domestic supply.
According to customs data, China’s refined oil exports reached 8.82 million tons from January to July, up 45.5% year-on-year. Gasoline exports rose 30.9%, and diesel exports jumped 1.53 times. Meanwhile, imports fell sharply, dropping 20% during the same period. This imbalance has caused local shortages in regions like Guangdong, Zhejiang, and North China, raising concerns about energy security.
In response, the government must take swift and measured steps to adjust domestic prices in line with market conditions, reducing the disparity between domestic and international prices. While the adjustment must be gradual, it is essential to consider the affordability of consumers and provide necessary support measures. Therefore, it is likely that domestic gasoline and diesel prices will continue to rise in the near future, reflecting the ongoing pressure from high global oil prices.
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