China Sets Oil Price Floor to Protect Domestic Supply

China Sets Oil Price Floor to Protect Domestic SupplyChina Sets Oil Price Floor to Protect Domestic Supply

China will not let fuel prices fall in line with crude below $40 a barrel, as the world’s second-biggest oil consumer seeks to curb pollution and shield domestic producers from the oil price collapse.

The price of fuels such as gasoline and diesel will not be adjusted as long as crude is below $40 a barrel, the National Development and Reform Commission, the country’s top economic planner, said in a statement on Wednesday, Bloomberg reported.

Profits from fuel sales below the $40 level will go to a fund to promote energy conservation and security and improve fuel quality, according to NDRC.

The $40 floor is “appropriate” even as domestic production costs are higher than that level, NDRC said. "Low prices would be a short-term benefit but it may put constraints on China’s domestic oil production and reduce supply."

The decision this winter by President Xi Jinping’s government to suspend fuel price cuts amid oil’s slump, while the country’s biggest cities were shrouded in smog, was explained as an attempt to curb vehicle pollution.

“China’s biggest oil companies are not equipped to operate and compete in a crude environment below $40 a barrel,” Laban Yu, head of Asia oil and gas equities at Jefferies Group LLC in Hong Kong said on Wednesday. “From energy security perspective, it makes sense for NDRC to set the floor.”

Brent crude, the global benchmark, capped a third yearly decline in 2015 and has fallen to the lowest in more than a decade as the Organization of Petroleum Exporting Countries effectively abandoned production limits in its last meeting amid a global glut.

“The benefits from keeping prices below $40 a barrel will accrue to the Chinese government, which will be used to fund energy efficiency and diversify away from oil,” Neil Beveridge, a Hong Kong-based analyst at Sanford C. Bernstein & Co., wrote in a research report Wednesday.

“By keeping oil prices too low, OPEC is now indirectly funding their largest customer to develop more efficient energy use. In our view, this is another sign that oil prices are too low,” he added.