Pump it up

Defending prices: PetroChina

A common conundrum for Chinese consumers is why the price at their petrol pumps is so much higher than in America.

And with oil prices slumping over the past few months, they’ve also been asking why their fuel hasn’t been getting much cheaper.

The main answer for the price differential – according to PetroChina (the listed subsidiary of China’s biggest oil major CNPC) – is taxes.

This is what PetroChina claimed in an article posted on its WeChat account. Some might find the oil firm’s arguments a little confused – at first it gives reasons why American oil prices are low (including an obligatory swipe at how US military bases in the Middle East guard its interests) before concluding that, actually, US prices are roughly the same as China’s.

The state-owned giant claims that the documented cost of petrol in China includes 48% tax, while in America the reported figures are all before tax, which then adds approximately 22%.

Using New York as an example, PetroChina explains that if a litre of petrol in the US costs Rmb2.6 (40 cents), the true price will rise to Rmb3.31 after taxes.

Meanwhile a litre of petrol in China costs about Rmb5.67 but that would fall to Rmb2.95 once the 48% tax rate is excluded.

Although the China price is still higher (by around 13.5%) the message from PetroChina is clear enough: the underlying costs of a litre of fuel are pretty similar. So don’t blame us, it’s the taxes.

CBN Weekly then took issue with the calculations, contesting that the data for US petrol prices is actually inclusive of taxes, so the cost of the like-for-like New York litre wouldn’t increase. Instead it would go down. Nevertheless, CBNdrew a broadly similar conclusion: once you remove Chinese taxes, the prices are not so dramatically different.

Chinese consumers still complain that prices are too high, of course. And they were given more reason to grumble at the beginning of this year when the National Development and Reform Commission (NDRC) introduced fresh pricing rules for oil sold in the Chinese marketplace.

Under the new policy, the per barrel cost of oil has been capped at $130 and floored at $40. So if oil continues to trade globally at prices below $40 per barrel, Chinese citizens won’t see this reflected when they refill their petrol tanks. (In fact, they may even have faced a small rise in prices this week as the cost of Brent crude edged back above $40.)

Bloomberg reports that the price floor is “designed in part to shield oil drillers and producers from the global price collapse”. Due to the lower quality of China’s oil resources and the relative underdevelopment of its extraction infrastructure, the cost of producing oil is higher than the global average of about $40 per barrel – the level of the new price floor.

The measure won’t protect producers completely. In late February China Daily reported that the country’s fourth biggest crude producer, Shaanxi Yanchang Petroleum Group, might cease operations at a number of fields, where its costs of production stand at $70 per barrel, well above the price floor.

The week before Yanchang’s announcement Reuters reported that Sinopec was closing four fields as it too struggled to cut costs amid plummeting oil prices.

But if oil prices stay low, the price floor might have distinct benefits for parts of China’s refining industry. The central government has also been taking advantage of low international prices to increase its strategic stockpile of crude – potentially importing 370 million tonnes by the end of the year, Bloomberg reports. At the same time, as per the NDRC’s new policy stipulations, some of the profits that the Chinese oil majors make from selling imported fuel – purchased at prices below the $40 floor – will be channelled into a fund for developing fuel quality, promoting energy conservation and reducing pollution.

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