Government should refine gas price mechanism

International oil prices, because of the European debt crisis and the US debt rating downgrade, have recently been dropping, especially prices for Brent crude oil futures and crude oil futures on the New York Mercantile Exchange.

The Chinese public is up in arms over China's consistently high gas prices. They are questioning why domestic gas prices haven't dropped. People also are questioning why China has designed its current pricing mechanism to be in favor of domestic oil companies, though the nation's oil companies immediately went on the defensive to say this was not true.

So who is right? Let's discuss this from at least three perspectives.

First, according to the current pricing mechanism, domestic prices are adjusted when the average price changes by 4 percent in 22 working days. This pricing mechanism is insensitive to short-term oil price fluctuations. Based on recent oil price movements, a 4-percent variation can be easily met, but the time interval of 22 working days is difficult.

What that means is even if international oil prices drop substantially, you will still have to wait 22 days to see a corresponding drop.

Second, since China mainly imports its crude oil from the Middle East and Africa, and not from North America, the pricing mechanism is mostly based on the average of three crudes: Brent, Dubai and Cinta. The oil prices for these three did not decline as much as the crude exchanged on the New York Mercantile Exchange. The third, based on past observations, some within the Chinese public are saying that the design of China's current pricing mechanism creates more opportunities for domestic gasoline prices to go up than come down. This claim hinges on the fact that since China changed its pricing mechanism in 2009, international oil prices have generally increased from $40 per barrel to about $100 per barrel.

International oil price variations will materialize in 22 working days and the 4-percent adjustment will be made before the 28th of the month. Domestic gas prices, in other words, will trickle down. But this is based on the assumption that international oil prices will continue to go down or at least maintain their current low level. What we are worried about is that, if international oil prices go up again, the adjustments for domestic prices won't occur and consumers will certainly be very disappointed.

It's understandable that domestic drivers want gas prices to drop. The last downward price adjustment for domestic refined oil products occurred on July 1 of last year. Since then, domestic gasoline and diesel prices have been adjusted for incremental increases four times. They presently are at all-time highs.

Domestic complaints about the pricing mechanism are also understandable. Chinese oil companies are State-owned. Presently, domestic oil prices are higher than prices in other countries - such as the United States, for example - because these countries have adjusted their oil prices in a timely fashion.

Therefore, in my view, the government should take advantage of current lower oil prices and the public desire for price adjustments as an opportunity to reform the pricing mechanism. Instead of the standard four-day adjustment, make it 10 working days, and instead of 4-percent variation, make it a 2-percent variation. Make the mechanism automated. This can ensure that prices can be adjusted every 10 working days.

If the government is concerned about the impact of substantial increases of oil prices on consumers, the government could do two things: one is to reduce the consumption tax, which is currently close to 25 percent of the price for gasoline, and second, set ceilings for upward price adjustments.

The author is an energy professor at Xiamen University.