Right Reference Needed as Govt Eases Grip on Oil Prices

Authorities in China are considering giving domestic oil companies more freedom when it comes to pricing their products for the market. Currently, prices for refined oil products in the country are tied to a basket of crude oils which includes Brent, Dubai and Cinta. When the moving average on this basket fluctuates by more than 4 percent over a 22-day period, the National Development and Reform Commission (NDRC) can consider adjusting gasoline and diesel prices in the domestic market.

I'm certain that many industry experts will agree with me when I say that regulators should modify the current pricing mechanism to allow for more frequent price adjustments. Given the volatility seen recently in the international crude market, shortening the 22-day tracking period to, for example, 10 days would go a long way toward reducing the pricing lag that has long been undermining the oil industry's performance. At the same time, the government should also step up establishing and promoting the development of crude oil futures in the domestic market to give the country more pricing power.

Yet, before China can start exercising its pricing muscles, authorities should first choose an appropriate pricing benchmark which is both influential in the global market and reflects the costs of the country's major oil suppliers. Based on these criteria, China would be better off using Dubai as its benchmark rather than Cinta and West Texas Intermediate (WTI).

Unlike the US and many countries in Europe, China mainly imports crude oil from the Middle East and Africa. In 2011, 51 percent of China's crude oil imports came from the Middle East, and some 24 percent shipped from Africa. Most of these imports were priced according to the Dubai benchmark, making this a major reference for the pricing of refined products in China.

Cinta, a major benchmark for oil products in Asia, is a much less important standard for China compared to Dubai.

At present, few of China's oil imports originate from Asia and this region is expected to play a minor role in the country's energy strategy in the future.

The same statements can also be applied to WTI, a benchmark for crude commodities produced in the US. WTI used to rank as one of the world's most prominent crude benchmarks, yet its sway in the global market has faded in recent years as the US consumes more of its own locally-extracted oil.