Pricing reform for China oil giants unlikely

Surging oil prices and rising demand for gasoline and diesel have created a difficult environment for Chinese refiners due to price caps on refined products.

However, any reform in the pricing mechanism is unlikely in the short term, according to officials of China's main economic planning body.

Oil giants PetroChina (0857) and Sinopec (0386) were ordered to increase fuel products last month to end shortages in provinces including Fujian and Heilongjiang, said Bi Jingquan, vice chairman of the National Development and Reform Commission.

The increased refinery runs to meet government requests for additional supply may deepen the firms' refining business losses because they cannot pass the rising cost to consumers. Diesel and gasoline prices are under state control in a bid to curb inflation.

Bi said despite rising oil prices on the world market, both refiners have not requested a price hike.

Officials of PetroChina and Sinopec said they will post a loss in refining business if crude oil prices stay above US$65 (HK$507) and US$64 a barrel, respectively.

"China's crude prices have been linked to international markets, and we will reform finished oil prices [at home] based upon it, that's a set direction" Bi said, added that international oil prices and affordability from all social aspects will be fully consider before the reform is carried out.

Chen Deming, another NDRC vice chairman, said: "Reform of China's fuel prices is a subject worth serious studies ... we can't possibly achieve that in one big step"

Analysts have said a rise in fuel prices or a reform in the pricing mechanism of refined oil products is not possible this year, because the inflation rate already exceeds the government target. A price hike would worsen the situation.

With inflation in mind, electricity prices have also not been fully liberalized - a move which hinders environmental protection and energy saving.

Chen said longer generating hours will be allowed for plants that consume less coal and emit less carbon dioxide and gradually raise tariffs for hydropower to encourage cleaner energy.