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Calls for oil price reform as world prices fluctuate

By Ding Qi (chinadaily.com.cn)
Updated: 2008-11-05 16:49

Volatile oil prices may be in for further rises in the future, and experts are now suggesting the pricing system of oil in China be reformed.

At the Energy and Finance World Forum in Beijing over the last two days, economists from around the country gathered to consider China's next steps to safeguard energy security as unstability in oil prices and financial markets continues.

Uncertainty remains in oil prices

Oil futures traded in the New York Mercantile Exchange dropped nearly 33 percent in October, the largest monthly loss in history. Despite the plunge, economists said it was still too early to say the crude price had hit bottom, nor to assume a cheap oil supply in the coming years.

According to them, the trend of oil price currently is largely affected by two uncertain factors: demand and dollar.

"The global economic slowdown caused by the financial crisis has greatly cut oil demand worldwide," said Dong Xiucheng, professor and an oil expert at China Petroleum University. He added the trend will continue for a certain period as economic indicators of major industrial nations show no signs of quick recovery.

On the other hand, the swinging exchange rate of the US dollar also adds to the uncertainty of the oil price. "In the short term, it's difficult to reshape the existing international monetary system which takes the US dollar as a major denomination and settling currency. Therefore, the dollar factor is always considered in the estimation of oil prices," said Xia Bin, director of the Financial Research Institute of the State Council's Development Research Center, a government think tank.

Although the exchange rate of the greenback has rallied some 20 percent since July, both experts doubt whether the strong dollar could last given the huge capital release in the unprecedented US financial bailout plan.

In addition, Dong worried part of the bailout money may sneak into resource and commodity markets, which will revive speculation and push the oil price higher.

Based on above factors and the benefits of oil producing nations, Dong predicted that the oil price will be likely to run between $80 to $100 a barrel next year, although any extra factor could lead to unexpected scenario.

Multiple efforts to carry out energy strategy

According to Chen Ji, professor from Capital University of Economics and Business, the financial crisis has helped squeeze most speculative bubbles out of the crude oil price. As part of the nation’s energy strategy, he suggested the country seize the opportunity to reform the pricing system of oil and other resources and make the prices reflect actual market demand and supply.

At present, domestic prices of refined oil were mainly under government control. With the diving of international crude price, the price gap between domestic and overseas market is waning, which analysts said is a good chance for China to mobilize its energy prices.

"I believe the authority will deal with the oil pricing issue before the financial crisis ends," said professor Dong.

To function efficiently, the new marketized system should adopt an improved price linking mechanism and speed up the frequency of price adjustments according to the international oil price, he said.

In terms of overseas oil trading, Xia suggested the country seek multi-currency settlement for oil deals and possible currency swap between China and oil producers to avoid the impact of dollar fluctuation.

In addition, a diversified foreign exchange reserve would also be beneficial to the country's financial and energy security.

"Among all the reserve options, oil reserves can be very important one," he added.