China is working to review oil policy and strategy to determine the most favorable path forward to “bolster” oil company profits and avoid [prolong] rising fuel costs. One large driver for this effort is the upcoming Olympic games, which has been a sore spot for the country politically and logistically these past several months. Ensuring a plan is in place to pre-emptively manage whispers of inflation prior to its Olympic debut is on its shortlist of initiatives. The Sichuan earthquake and impacts to Consumer Price Index (CPI) is another factor making for a delicate decision making process.
The most viable of proposed paths is the suggestion to relax windfall production profit tax, lessening the burden on China's heavy hitter producer PetroChina and champion refiner Sinopec. Two years ago, a tax was established to charge domestic crude oil producers 20-40 percent of revenues at oil prices above $40 a barrel. The relaxed tax policy would raise the point of taxation to $60 a barrel, and is estimated to preserve “up to $6 billion in revenue on China's 1.36 billion barrels of annual output.”
Other considerations included leveraging local fuel supplies through cutting the costs of imports or raising those of exports.
Chinese domestic prices are far below global rates for fuel. In the past two years, China has only raised domestic prices twice, the most recent spike being 10% last November. Crude oil has come up 39% against China's 10%. To better demonstrate the widening gap, what about this statistic:
Reuters has reported that China has the financial “wherewithal” to hold out for awhile before having to address aligning its fuel prices with market rates. Though it's the ultimate objective, the Chinese government is doing everything in its power to implement this at a measured pace.
