International | Sep 19 2008
By Chris Shaw
Having petrol prices linked to the oil price means Australians feel the pain when the oil prices surges as it did in the first part of this year, but they also feel some relief when prices weaken as they are currently doing. But in China the oil price is subsidised by the government, which means consumers have felt little pain or benefit from the recent fluctuations in oil markets.
As evidence of this, Standard Chartered notes that while the oil price has fallen by almost 40% in the past two months, wholesale gasoline prices in China have fallen by just 2-4%. But with import prices now below domestic prices for the first time this year, the group suggests there is a chance for authorities to adjust the subsidy system, particularly as inflationary pressures are also easing at present.
The reason a change makes sense is the current system is very costly to operate, as the government has to subsidise the refinery sector to keep prices at desired levels. As an example, Standard Chartered notes Sinopec, China’s largest refiner reported a loss of US$6.6 billion in the first half of 2008 thanks to higher oil prices and the need to import 70% of its oil throughput.
Under the subsidy system, the government was required to pick up the tab for the losses, a situation expected to worsen over time given the increasing number of cars used in China and the general increase in demand for fuel as the country’s industrialisation continues.
The recent falls in the oil price have improved the equation for the company, but Standard Chartered still estimates it will take a fall to US$85-$88 per barrel for Sinpoec’s production costs to come into line with product prices, so oil needs to fall to this level for the company to just break even.
The better course of action in the group’s view would be for the government to again reform its pricing system, as by doing so it would reduce the amount it needs spend in subsidies, while still allowing the refineries such as Sinopec to generate profits.
Whether it does so is another question, but the present time seems an ideal opportunity, in the group’s view, particularly as with attention again turning to growth rather than inflation there will again be a potential impact from any future bounce in crude oil prices.
