China to relax fuel prices when oil below $130/bbl

China plans to relax controls on fuel prices as long as crude oil stays below $130 a barrel and ease curbs on refiners under a long-awaited reform plan, an official source familiar with the issue said on Friday.

The source confirmed a report in the official Shanghai Securities News, which quoted unnamed sources as saying that when crude was below $80 a barrel, refiners would be able to set fuel prices in line with crude. With crude between $80 and $130, they would have to accept reduced profit margins.

Under the new scheme retail price movements would be restricted to 800 yuan ($117.1) per tonne each month and 1,600 yuan per tonne within three months, the newspaper said.

But refined oil prices will still only be allowed to fluctuate at intervals of at least 10 days, the official source told Reuters.

The source also stressed that all the plans would be published to seek public opinions and altered, if necessary, before taking effect.

The reform package will allow retail prices to rise 4 percent above refinery gate prices, after factoring in the cost of transport and distribution, the official source said. Refinery gate prices include crude costs, processing costs and a "reasonable profit margin".

Chinese media reports have said the average crude price is based on a basket of Brent, Dubai and Minas blends of crude oil.

Introducing some competition

Qiu Xiaofeng, an oil analyst with China Merchants Securities, said the reform plan could help oil firms Sinopec and PetroChina, which have often had to bear big refining losses when crude oil is pricier than Chinese fuel prices.

"Refineries would be better shielded from refining losses than in the past and oil firms' profitability would also be more predictable," he said.

"Given the recent hefty slump in oil prices, it would also introduce some competition into products selling."

But Qiu doubted if the new pricing mechanism would weather wide swings in the oil market, since it maintained a unique formula of margin levels and did not address the issue of how to combine it with international refinery margin fluctuations.

U.S. light crude has lost almost two-thirds of its value since reaching a peak of $147 a barrel in July, spurring a big increase in imports into China, where the government has not moved prices since June, giving refiners a rare chance to make big profits supplying motorists.

The government also intends to raise the refined oil consumption tax, which will be renamed "fuel consumption tax", to replace road and waterway tolls and fees and some road charges, the official source told Reuters. The relevant road charges will be scrapped on Jan 1, 2009.

The fuel consumption tax, covering seven refined products, will be raised sufficiently to replace the revenue from the scrapped tolls, fees and charges, totalling around $24 billion a year.

"This might explain the sudden surges in wholesale fuel prices in some regions recently", Qiu said.

The tax is now levied on refiners, but the reform envisages moving the burden to fuel wholesalers at an appropriate time.

Although the reform plan aims to loosen prices, fuel prices for rail freight will be set once a year, based on the previous year's diesel price, and airlines' fuel surcharges will be adjusted every six months, based on the previous six months' prices for jet kerosene.

Many fuel users, such as those in the farm, fishing, forestry and urban transport sectors, will continue to get state subsidies to offset the cost of fuel.

And local governments, who can expect to receive tax payouts in line with their previous revenues from transport tolls and charges, will be left to decide the prices for taxis.

Many taxi drivers have gone on strike across China in recent weeks, partly in protest at the high fuel prices, which are now higher than U.S. pump prices.