Beijing is grappling with a set of difficult and sometimes contradictory proposals to reform its oil pricing system, in an effort to head off a repeat of this year's fuel shortages and introduce long-term incentives to temper consumption. The measures include a windfall tax on upstream oil and gas production, a policy that would cut directly into the profits of the overseas-listed PetroChina. This is a unit of China National Petroleum, the country's largest energy company. The windfall tax, proposed by the Finance Ministry and partly inspired by the debate in Washington on the record earnings of US oil companies, was first raised in November and seemingly rejected. But it has returned to centre stage. The shortages are a direct result of the government's refusal to lift domestic pump prices in line with the sharply rising global cost of oil. This was an attempt to shelter parts of the economy, especially farmers and volatile urban taxi drivers, from increased costs. "China is an oil-scarce country ... but pump prices are now one-third lower than in the US and barely one-third the price in some countries in Europe," said the World Bank in a recent report. The gap between high crude oil costs and low local pump prices forced the country's dominant refiner, China Oil and Petrochemicals, or Sinopec, to sell its products at a hefty loss last year. The price gap also gave local producers an incentive to export oil, even though China is a net importer, resulting in severe shortages in parts of the country in July and August. Despite pressure from Sinopec in particular to fix the pricing anomaly, the government remains reluctant to lift pump prices closer to global levels, fearing it would anger consumers and destabilise sections of industry. The same fears have caused the Finance Ministry to delay repeatedly the introduction of a fuel consumption tax, despite the measure being approved by the State Council, China's cabinet, at least two years ago. "Everywhere in the world, moving from control to decontrol of prices creates turbulence and also political costs," said Daniel Yergin, of the consultancy Cambridge Energy Research Associates (Cera). Cera's Beijing-based analysts believe the fuel shortages this year could be repeated on a much larger scale in 2006 unless the pricing system is rationalised. The windfall tax raised by the ministry might be one way to fund measures to ease the transition to higher pump prices. Beijing has also been considering direct subsidies to refiners to prevent reduced production resulting in renewed shortages, according to Sinopec. (FT Syndication Service)
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