(China Daily)
Updated: 2007-11-26 09:00

As the price of oil in international market seems destined to burst through the US$100 mark sometime soon, it will only be more difficult for Chinese policymakers to prevent domestic oil prices from further rising.

The authorities' effort to stabilize oil supplies is essential to ensuring sound development of the national economy. But stopgap measures should not replace market-oriented reform of the country's oil pricing mechanism.

The Ministry of Commerce on Saturday urged local commerce bureaus to set up an early warning system to ensure adequate oil supplies at filling stations.

China raised the prices of gasoline, diesel and aviation kerosene by 500 yuan (US$67.6) per ton, almost a 10 percent rise, starting from November 1. Though the price hikes have eased the fuel shortage to some extent, many regions still face tight diesel supply.

A key reason behind these emergency fuel shortages is that domestic refineries are still reluctant to expand their capacity because of soaring costs and government-controlled fuel prices. As international crude oil prices rose to a record recently, the price hikes early this month are simply too late and too small to provide domestic refineries enough incentives to boost production.

The new early warning system will enable policymakers to monitor domestic oil supplies more closely to check speculative activities that can aggravate fuel shortages across the country.

However, to address the root cause of the imbalance between oil supply and demand, the government has no choice but to reform the oil pricing mechanism to reflect international levels and allow oil firms to transfer the cost to users.

Chinese policymakers have indeed deliberated on this reform for many years. Yet, the country's expanding demand for oil and soaring international oil prices have made such a reform more urgent than ever now.

For the first nine months of the year, China, the world's second-largest oil consumer after the United States, imported 3.4 million barrels of diesel, a 46.5 percent increase over the same period in 2006.

While international oil prices have been testing the US$100 mark recently, it is widely believed that the world, more than likely, will have to adapt itself to triple-digit oil prices in coming years.

Further hikes of domestic oil prices will certainly exert some negative impact on the country's efforts to rein in general price inflation. But the cost of not doing so may be even bigger.