Study On China's Oil Pricing Mechanism And Policies

As an important energy source and chemical raw material, oil has played an important role in the development of national economy. Changes in oil prices have deeply influenced economic trend of each country in the world. Oil is also an important strategic material and means a great deal to China's national security. International crude oil prices have began rising, and accompanied by dramatic fluctuations since the beginning of 21st century. Oil prices rose to a great height during the first half year of 2008, then fell quickly during the second half. The fluctuations of oil prices have caused serious concern to governments. Various countries have attached great importance to oil security. Oil price has also become a hot research topic domestically and internationally. The study on oil prices has primarily focused on two aspects which are the oil pricing mechanism and the impact of oil prices fluctuation on the national economy.The international crude oil market is divided into the spot market and futures market. And the prices in futures market could guide the prices in spot market, also playing a decisive role in the formation of international crude oil prices. Although futures market has provided a means of hedging for oil transactions, it has also created conditions for speculative activities for some people. And there are more and more speculative activities in oil futures markets. Speculative activities have added fuel to the fluctuations of oil prices, from which international speculators have reaped a lot. The current global proven oil reserves have been mainly distributed in the Middle East, Africa and South America where most countries have been in a state of scourge of war for a long term, causing the further instability of oil prices. The rise and fluctuations of oil price have brought a lot of adverse effects to developing countries like China which is developing rapidly and has been more and more dependable on oil imports.China's oil prices were in a state of high-pressure control in a long period after the liberation. And this kind of control had been compatible with the planned management system of national economy. Since the reform and opening-up in 1978, the process of marketization has gone deeply, with oil price controls gradually liberalized. Planned price and market price both existed in a period of time from 1991 to 1997. China's domestic oil prices began to integrate with international oil prices in 1998. At present, for China's refined oil prices, the two oil groups which are China National Petroleum Gas Corporation and China Petrol-Chemical Corporation can mark basis-price up or down by 8%.The basis-price is a weighted mean value of the prices in New York, Rotterdam, and Singapore. However, the China's oil pricing mechanism has been exposed a lot of defects in the new international situation, such as oil monopoly profits, the domestic oil prices rigidity, unreasonable phenomenon in levying taxes and fees. All social sectors have made efforts to call upon the government to reform oil pricing mechanism. This is also my reason for writing this article.This paper have studied the China's oil pricing mechanism , consisting of five parts.The first part is the introduction which has introduced writing background, significance of the research, relevant literature review and the frame of the paper. Literature review, which is divided into foreign part and domestic part, have mainly introduced the research results on the oil pricing mechanism and the influence of the volatility of fluctuation of oil prices of domestic scholars and foreign scholars.The second part has analyzed the formation mechanism of domestic and international oil prices. First of all, it has reviewed the changes of China's oil pricing mechanism in history and pointed out a number of shortages of current China's oil pricing mechanism, including the lag of domestic oil prices, the weakness of price function, the monopoly of oligopoly firms and the lack of risk control system.. Then, it has introduced the mechanism of international crude oil prices formation and analyzed the causes of fluctuations of international crude oil prices. The foundation of the formation of international crude oil prices is still supply and demand. But in the short time, the crude oil prices are very unstable because of the instability of geo-political factors and the speculation in futures markets.The third part has conducted the empirical analysis on the impact of oil price fluctuations. Firstly, it has pointed out that changes in international crude oil prices will affect the formation of domestic crude oil prices through a simple analysis of the linkage in crude oil prices at home and abroad. The fluctuation of international crude oil prices effect China's economic development through price transduction pathway. Then, it has established an input-output price model to analyze the impact on the national economy sectors by changes in oil prices. The data has been quoted from China input-output tables of 2002. The model analysis has showed that changes in oil prices have a greater impact in coal industry, chemical industry, metal refining, metal product industry, metal smelting, electrical and machinery industry, electric power and heating power industry and transport industry.The fourth part has explored the experience of control and reformation of oil prices in other countries. As economically developed countries, the United States'and Germany's oil pricing mechanisms have been almost mature and perfect. Giving a very high regard to marketization, the U.S. government has not interfered with the formation of oil prices completely. Oil-producing enterprises can set up their own prices. Germany goes more further on tax reforming than the United States. Most European countries are levying high fuel oil tax. Cost prices of refined oil only make up about a quarter of the final retail price. High fuel oil taxes can effectively weak the severe adverse effect brought by the dramatic fluctuations of international crude oil prices. On the other hand, Germany government has a very mature oil reserves plan banding with the oil enterprises and has built a monitoring system in oil prices. South Korea and India had reformed their oil pricing mechanisms in late 20 years. China can learn a lot from the experiences of reformation of oil pricing mechanisms both on successful aspect and failure aspect.The fifth part has made some policy recommendations which have given some suggestions on four aspects. And these suggestions are mainly beard on establishing and strengthening the laws about oil prices, persisting in oil prices led by the market and introducing appropriate competition, using tax policy actively and flexibly and establishing strategic oil reserves and risk monitoring system on oil prices.The final part has summarized the whole points of this article, analyzing some inadequacies of the article and carrying out the prospect of the study on oil pricing mechanism.