An employee at a local gas station in Ningbo, East China's Zhejiang Province puts gas into a car on Tuesday. Photo: CFP

China will further improve the oil pricing mechanism it launched in 2013 by introducing cap and floor prices beyond which prices of refined oil products won't be adjusted, despite the link with global oil prices, the nation's top economic planner announced on Wednesday in Beijing.

Under the updated mechanism, China will adjust domestic prices of refined oil products when international crude prices translate into a change of more than 50 yuan ($7.6) per ton for gasoline and diesel for a period of 10 working days, but will not do so if the international prices go below $40 or above $130 per barrel.

Thus far, the mechanism has ensured the orderly supply of oil products and boosted market competition, as well as promoting transparency, the National Development and Reform Commission (NDRC) said in a statement posted on its website Wednesday.

However, global crude prices have fallen heavily since the second half of 2014, down from an average of $110 per barrel to below $40 per barrel, and this trend poses a threat to the sound development of China's oil industry over the long term and will also hinder the development of the new-energy and renewable energy sectors, the NDRC said.

Protection

"Low oil prices will encourage people to consume more refined oil products," Lin Boqiang, director of the China Center for Energy Economics Research at Xiamen University, told the Global Times Wednesday. 

Lin said that low oil prices could potentially undermine the government's efforts to combat severe air pollution, which is rampant in a number of Chinese cities.

Lin noted that the government has been considering setting a floor price since a period of particularly heavy smog in December 2015.

China is the world's second-biggest oil consumer by volume and has been stocking up on reserves amid the low global oil prices. It is also a major producer of the resource.

The NDRC said in its statement that $40 per barrel is the average cost of crude production for major international oil companies, but Chinese oil production costs are higher than the global average due to natural conditions.

"The floor price could be a positive move that could prevent Chinese oil companies from being affected by continuously declining crude oil prices," Li Li, research director at Shanghai-based consulting firm ICIS China, told the Global Times Wednesday.

"Considering the current lackluster domestic demand and slowing economy, the move can protect the profitability of the domestic oil industry," Li said.

Imports account for about 60 percent of China's oil consumption, and there is a growing concern about national energy security as a result, according to media reports.

New cut

Also on Wednesday, the NDRC announced a cut in retail prices for gasoline and diesel from Thursday, in line with a slide in global crude prices.

Gasoline prices will drop by 140 yuan per ton, while diesel prices will be cut by 135 yuan per ton.

Before the cut, the NDRC had suspended price adjustments of domestic refined oil products twice in December, as it was working on improving the oil pricing mechanism.

The NDRC also said that the pricing mechanism will also be simplified and that any information related to price changes will be posted on its website.

In 2015, China imported a record 335.5 million tons of crude oil, up 8.8 percent year-on-year, data from the General Administration of Customs (GAC) showed on Wednesday.

Meanwhile, the bearish outlook for oil remains, with one forecast released by the US Energy Information Administration on Tuesday saying that the global oil glut will only be eased in the third quarter of 2017.

Li noted that the potential price gap that could be created by the new floor price in China may create room for oil smuggling, particularly if global oil prices keep falling.