(Source: Outlook Think Tank 2020-06-10）

Dong Xiucheng

The new round of domestic oil price adjustment window will be inOpen at 24:00 on June 11th.

Since the beginning of this year, as international oil prices continue to fall, domestic refined oil retail price limits have been experienced10 adjustments, 7 of which were stranded and 3 were lowered. Gasoline prices in many places in China have entered the "5 yuan era."

The author believes that the time is ripe for complete marketization of refined oil prices.

*As far as domestic development is concerned, with the full resumption of work and production, promoting the market-oriented reform of refined oil prices will help alleviate the pressure of "promoting domestic demand, stabilizing growth, and protecting people's livelihood."

*From the perspective of the international environment, international oil prices continue to run at low levels, and promoting the market-oriented reform of refined oil prices may encounter relatively little resistance, costs and risks.

So, how should the reform be promoted?

Does the marketization of refined oil pricing mean that gasoline and diesel prices will fluctuate frequently?

1. Refined oil pricing is becoming more market-oriented

With the rapid development of my country's economy and society, the market-oriented reform in the energy field has been steadily advancing. The market-oriented pricing of refined oil products is the most important part. Through continuous improvement of the mechanism, it has generally achieved integration with international standards.

On May 28, 2020, at a gas station in Shijiazhuang, Hebei Province, staff were refueling the car.

fromFrom 1998 to 2008, refined oil pricing achieved a successful transformation from “complete planning” to “a combination of planning and market”.

fromFrom 2008 to 2018, the marketization of refined oil pricing has further improved:

*On November 25, 2008, the domestic refined oil price formation mechanism reform plan drafted and approved under the leadership of the National Development and Reform Commission was announced for the first time. The main content is to change the pricing mechanism that allows the retail benchmark price of refined oil to fluctuate up and down, to implement a maximum retail price, and to appropriately narrow the price difference in the circulation link;

*The "Notice on Further Improving the Price Formation Mechanism of Refined Oil Products" issued on March 26, 2013 shortened the price adjustment cycle, shortening the pricing and price adjustment cycle of refined oil products from 22 working days to 10 working days, and canceled the 4% range limit;

*On January 13, 2016, in order to mitigate the impact of the sharp drop in oil prices on the domestic market and ensure the long-term security of domestic energy, the National Development and Reform Commission improved the refined oil price mechanism and set a lower limit of US$40 per barrel and an oil price control risk reserve.

In accordance with the regulations on the collection and management of oil price control risk reserves, the oil price control risk reserves are included in the general public budget management and are used for energy conservation and emission reduction, improving oil product quality, and ensuring oil supply security.

The above reform process shows that the pricing of refined oil products is gradually becoming market-oriented, which is manifested by three main characteristics:

First of all, the price adjustment cycle is gradually shortened;

Secondly, the representativeness of affiliated oil types has been further enhanced;

Third, there is a huge improvement——The National Development and Reform Commission will no longer use administrative means to intervene in the price of refined oil products calculated based on international crude oil prices. It will be based entirely on the calculated value, and no artificial adjustments will be made before the announcement.

Currently, market entities in the domestic refined oil field are diversified, crude oil usage rights and crude oil import quotas are fully integrated, and market-oriented reforms are accelerating.

In November 2019, the National Development and Reform Commission website released the "Central Pricing Catalog" (revised draft for solicitation of opinions) to publicly solicit public opinions. It was mentioned that the price of refined oil products will be temporarily based on the current price formation mechanism, and will be adjusted in a timely manner according to changes in oil prices in the international market. It will be formed by the market based on the overall liberalization of the system reform process. This statement establishes a basic premise for the comprehensive liberalization of refined oil prices.

2. There are two worlds in the domestic w88 market of refined oil products

It is worth noting that taxes and fees account for a large proportion of the price of refined oil, among which the proportion of consumption tax is close to the retail price1/3. my country implements consumption tax on refinery shipments, and the consumption tax on gasoline and diesel is relatively large. At the same time, domestic consumption tax is a central tax and is collected by the national tax department. Local enthusiasm is not high, and consumption tax often becomes the hardest hit area for tax evasion.

For a long time, there have been two worlds in my country’s domestic refined oil w88 market:

One is withState-owned enterprises and compliance-operated enterprises headed by "Four Barrels of Oil" must pay all taxes due, standardize invoice issuance, and use the terminal advantages of gas station outlets to achieve profits;

The other is some non-compliant operating companies. They basically do not issue gasoline and diesel invoices for the refined oil products shipped from the factory. Some companies avoid taxes by importing related categories of blending materials. The companies gain asymmetric competitive advantages through tax loopholes.

When international oil prices are relatively high,With the integrated competitive advantage of "Four Barrels of Oil", the overall adjustment space is large; when international oil prices are running at low levels, especially when ensuring energy security in the early stage, "Four Barrels of Oil", which has invested heavily in the upstream, will face the dilemma of being unable to effectively replenish cash flow in the downstream that operates in compliance with legal regulations.

Recently, international oil prices have fallen below a barrelThe lower limit of regulation is US$40. Since March 18, my country has begun to implement the "floor price" policy for domestic gasoline and diesel prices. At the same time, in accordance with the Oil Price Regulation Risk Reserve Management Measures issued in 2016, domestic oil refining companies should accrue and pay risk reserves.

[Note: FollowIn the refined oil price formation mechanism issued by the National Development and Reform Commission in 2016, domestic refined oil prices are regulated with a “ceiling price” and a “floor price”. The upper limit of the regulation (ceiling price) is US$130 per barrel, and the lower limit (floor price) is US$40 per barrel. 】

In gasoline and diesel pricesUnder the restriction of "floor price", the window for arbitrage import of coastal oil-mixing materials is open. On the one hand, the outbreak of the global epidemic has caused a sharp decline in demand, which has blocked the export of domestic refined oil products and resold them domestically; on the other hand, overseas light cycle oil and mixed aromatics have taken advantage of loopholes in the tax system to enter the domestic market in a large scale.

In the past, the National Development and Reform Commission announced the maximum retail price of gasoline and diesel, and the wholesale price of domestic gasoline and diesel often deviated from it, which was a barometer of supply and demand in the domestic market. However,The "floor price" principle and the supporting oil price regulation risk reserve policy introduced in 2016, "four barrels of oil" can complete the risk reserve payment without discount. Local refineries that are not operating in compliance cannot collect risk reserves because they do not issue gasoline and diesel invoices.

This makesThe "four barrel oil" refinery is at a competitive disadvantage, its market share is gradually eroded, and the downstream cannot feed back the upstream. The original intention of the "floor price" policy to protect domestic upstream production capacity has failed.

Affected by the raging COVID-19 epidemic at home and abroad, our countryPMI hit a record low and fluctuated sharply, and the pressure of "six stability" increased significantly. In particular, road transportation and diesel consumption both dropped significantly, while fuel costs (fuel costs) accounted for more than 40% of the comprehensive operating costs of trucks, and the comprehensive cost of diesel consumption tax accounted for up to 40% of the oil price.

This is not only the main burden on road logistics and transportation costs, but also extremely detrimental to the recovery of economic growth after the epidemic; it is also due to the huge profit margin that has led to repeated evasion of consumption tax on refined oil, resulting in a large loss of national tax revenue; and it is also an important factor affecting the income of truck drivers (low- and middle-income).

3. The time is ripe for complete marketization

From the current international environment, under the impact of the new coronavirus epidemic, the era of international low oil prices may not last short, and the market supply and demand are loose. The previous over-emphasis on the strategic attributes of oil while ignoring its commodity attributes has gradually weakened, providing good external conditions for the marketization of refined oil pricing——The resistance, costs and risks that may arise from promoting the reform will be relatively small, and it is a good time to promote the market-oriented reform of my country's refined oil price mechanism.

With the full resumption of work and production, promoting the market-oriented reform of refined oil prices will help ease the situationThe pressure of “promoting domestic demand, stabilizing growth, and protecting people’s livelihood”.

From the perspective of domestic environment, my country’s refined oil market is readyCharacteristics of “Three Modernizations”:

First, price adjustment is normalized.

Refined oil price adjustment is no longer a socially sensitive issue,In January 2016, the National Development and Reform Commission further simplified the price adjustment operation of refined oil. Instead of issuing price adjustment documents, it released price adjustment information in the form of information drafts. This signal shows that both the government, the media, and residents have gradually regarded changes in refined oil prices as a normal market behavior.

The second is the diversification of market entities.

In addition to the original PetroChina and Sinopec, the refining industry has also added state-owned enterprises such as CNOOC, Sinochem, and ChemChina, as well as a large number of independent refineries, and many independent refineries have obtained the right to import and use crude oil. The diversification of entities has brought about the diversification of oil sources for refined oil products, laying a good foundation for market competition.

The third is the normalization of competition.

At present, overcapacity in the refining industry has become an indisputable fact, leading to intensified competition in the refined oil market. In recent years, PetroChina and Sinopec have also launched price wars, driving down the retail prices of gasoline and diesel, even far below the guidance price of the National Development and Reform Commission, making the guidance price partially lose the meaning of existence.

Therefore, as the reform has advanced to the present, sufficient conditions have been met for the marketization of refined oil pricing, and the time to liberalize prices is basically mature. The country needs to speed up the reform process.

4. Marketization does not mean allowing price fluctuations

my country should consider using the Shanghai Oil and Natural Gas Trading Center to cooperate with the Shanghai Futures Exchange International Energy Trading Center to establish a refined oil market price system that combines spot, medium and forward and futures, and cooperate with the listed Shanghai crude oil futures to jointly enhance my country's oil pricing power and voice.

After the marketization of refined oil pricing, the current price guidance mechanism has been abolished, but this does not mean that the government can allow gasoline and diesel prices to fluctuate at will.

Theoretically, there are two price liberalization modes:

First, the government has issued relevant regulations and will implement oil price intervention policies in extreme circumstances, such as when a major natural disaster causes tight market supply. Under normal circumstances, there is no longer any control or guidance on prices.

Second, the government sets a reasonable price range in advance. As long as the price of refined oil does not exceed this range, it will not intervene. If it exceeds the range, necessary intervention will be implemented.

From a reform perspective, the first model is better. Because if you choose to set a price range, how to determine this range and how to adjust it requires the design of a complex operating mechanism.

At the same time as the price of refined oil is liberalized, it is recommended that the consumption tax on refined oil be adjusted appropriately from a central tax to a tax shared jointly by the central and local governments to increase local enthusiasm for collection, ensure that all consumption tax receivables are collected, and enterprises compete fairly and compliantly.

On this basis, a refined oil tax and price adjustment mechanism will be formulated to maintain basic price stability and adjust the actual consumer price level. When the price is high, the fuel consumption tax is reduced to reduce the cost burden on consumers; when the price is low, the fuel consumption tax is increased to enhance the motivation for the development of other alternative energy sources to facilitate the realization of the country's energy transformation and structural adjustment goals.

There is another reform closely related to the marketization of refined oil pricing, which is the reform of the refined oil import and export w88 system.

Currently, my country implements import and export quota management for refined oil products. It is recommended that refined oil imports be gradually and completely deregulated to level domestic prices with international prices. In terms of exports, it is recommended to completely liberalize and use my country's advanced refining capacity to compete for the refined oil markets of neighboring countries.

One of the focuses of this round of oil and gas reform is to decentralize the approval authority for refinery projects to the provinces. With the liberalization of crude oil import quotas, the complete liberalization of export quotas for refined oil products should be put on the agenda.

5. Enterprises may experience temporary discomfort

Although the conditions for reform are fully met, if market-oriented pricing of refined oil products is truly realized, many companies may experience temporary discomfort.

First of all, there are the large state-owned oil companies represented by PetroChina and Sinopec.

Currently, these companies still organize production according to the more traditional planning model. Production plans are formulated at the beginning of each year, and the crude oil is transported from which oil field to which refinery, and the refined oil enters which regional sales company from which refinery, as well as the quantity of each link. There are clear regulations. Although the National Development and Reform Commission as early asRestrictions on the wholesale price of refined oil were removed in the 2008 reform. However, in the process of calculating the retail price, a "quasi-wholesale price" of "crude oil price + processing cost + tax" will be formed. Petroleum companies still use this price as the basis to sell refined oil from internal refineries to internal sales companies.

Once the pricing of refined oil products is market-oriented, price fluctuations may lead to a reduction in oil sales by sales companies, which will be transmitted upstream and lead to refinery refined oil products"Hold it down", which in turn affects oil production from the oil field.

Therefore, after the marketization of refined oil pricing, the entire marketing model of these oil giants needs to be adjusted and find a more flexible market operation model.

Some private oil companies will also be affected, especially those mainly engaged in the wholesale and warehousing business of refined oil.

The reason is that these companies are good at speculation. According to the current government-guided pricing mechanism, there is a time lag from changes in international oil prices to adjustments in domestic refined oil prices, and it is easier for companies to judge the rise and fall of oil prices within this time gap, predict the government decision at each price adjustment node, and then decide whether to hoard or sell for arbitrage.

The National Development and Reform Commission will adjust the price adjustment cycle of refined oil products fromThe reduction of 22 working days to 10 working days has had a certain impact on this business model. After the future price is completely liberalized, the difficulty of price prediction will inevitably increase significantly, and this business model is destined to die.

(The author is a researcher at the Institute for Opening up, w88 casino, and a professor at the w88 casino of International Business and Economics)

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