Oil price regulation, note several key pieces of information

On March 23, the National Development and Reform Commission announced that, based on the current pricing mechanism framework, the government has implemented temporary adjustments to domestic refined oil prices.

According to the current pricing mechanism, starting from 24:00 on March 23, the domestic gasoline and diesel prices (standard products, same below) should each increase by 2,205 yuan and 2,120 yuan per ton, respectively. After adjustment, the actual increases are 1,160 yuan and 1,115 yuan.

It is important to note that this is the first adjustment since the current pricing mechanism was implemented in 2013.

What does this temporary adjustment mean? How will oil prices develop moving forward?

Tan Zhu has summarized several key points about oil price regulation.

According to regulations, domestic oil prices are composed of multiple components, including international crude oil costs, refining costs, circulation and transportation costs, taxes, and fees.

First is the international crude oil cost.

Under the current pricing mechanism, domestic oil prices are already close to the levels of May 2022—when, due to the escalation of the Ukraine crisis, international crude oil prices fluctuated significantly, causing a substantial rise in domestic prices.

This time, the influence is also due to geopolitical factors.

Meanwhile, the fluctuations in international oil prices have shown new characteristics—diverging trends in international oil prices.

Brent crude futures and West Texas Intermediate (WTI) futures are the most commonly used indicators, but besides these two benchmarks, Dubai crude oil and others are also important reference points for oil pricing.

From late February to early March 2022, during the escalation of the Ukraine crisis, the trends of these key crude oil futures were almost identical, with daily prices reaching around $120 per barrel. This time, since late February, the two major international benchmarks have increased by about 50%, while crude oil prices in the Middle East have risen far beyond that.

In addition to the rapid increase in crude oil prices themselves, other components of domestic oil prices are also facing uncertainties.

A clear comparison can be made with the situation during the Ukraine crisis in 2022.

In 2022, the conflict was mainly land-based, affecting pipeline transportation and causing localized port congestion. This meant the impact was relatively limited—according to the U.S. Energy Information Administration (EIA), global liquid petroleum supply was about 10.44 million barrels per day, with only about 24% coming from land and pipeline transportation.

However, this round, the U.S. and Israel’s military strikes against Iran directly threaten the Strait of Hormuz, which carries nearly one-fifth of the world’s oil transportation.

This military action has caused insurance premiums for oil tankers to skyrocket.

Reports indicate that before the conflict, the insurance premium for tankers passing through the Strait of Hormuz was roughly 0.25% of the vessel’s value. Since March, premiums have surged to 3%, and in extreme cases, even up to 5%, with continuous fluctuations.

Under such cost pressures, most shipowners choose to suspend voyages and wait, avoiding risks.

Even when ships sail, these costs are passed on through higher freight rates. The benchmark freight for super-large oil tankers (VLCCs) transporting 2 million barrels of crude from the Middle East to China once rose to over $420,000 per day, increasing by more than 90% within a few days.

The combination of rising oil prices, transportation costs, and insurance premiums explains why international oil prices have experienced significant volatility over the past ten days and have rapidly transmitted to end consumers.

To mitigate the impact of abnormal fluctuations in international oil prices on domestic production and daily life, we have taken regulatory measures this time.

Understanding these measures requires starting with our country’s pricing mechanism.

In 2016, China issued the “Oil Price Management Measures,” which improved the formation mechanism of refined oil prices.

Currently, the oil pricing mechanism has two clear features:

First, there is a adjustment cycle. Prices are adjusted every 10 working days.

It is because of this mechanism that a perceptible difference exists: why did prices not increase much during the last adjustment, but this time they rose significantly?

The last adjustment was on March 9, while the U.S. and Israel’s military actions against Iran began on February 28. During that cycle, only five working days were affected, and international oil prices had not fully reflected the changes yet. This cycle, however, fully covers the upward phase following the escalation of the conflict, with concentrated price increases, resulting in a larger overall adjustment.

Second, it is linked to a basket of international oil prices.

This approach aims to better reflect China’s actual import structure.

Lü Zhichen, Deputy Director of the Price Cost and Certification Center of the National Development and Reform Commission, told Tan Zhu that the basket of international crude oils included are highly representative, and the pricing references incorporate multiple international oil prices, making it more aligned with China’s actual crude procurement costs.

In simple terms, domestic oil prices can be understood as a dynamic adjustment system that references a basket of international oil prices every 10 working days, with upper and lower adjustment boundaries.

The actual increase in this round of price adjustment is actually lower than what the current mechanism would calculate.

This reflects the comprehensive considerations of the government.

Under the current mechanism, when international oil prices fluctuate abnormally, the government can intervene to regulate prices. This regulation aims to smooth out rapid short-term increases and prevent prices from rising too quickly, making it easier for all parties to absorb the shocks.

When international oil prices exceed $130 per barrel, a “ceiling price” is used to limit the increase, and refineries are given phased subsidies.

This mechanism essentially balances “market following” and “hedging against volatility,” preventing extreme fluctuations in international prices from directly impacting the domestic market.

In facing rising oil prices, our toolbox is becoming increasingly rich—diverse import sources, ample strategic reserves, flexible and bottom-line regulation mechanisms, and an evolving energy structure… these are the sources of our confidence in responding.