The government’s "second adjustment" to refined oil prices to reduce the increase, easing the impact of rising international oil prices

The National Development and Reform Commission announced on the afternoon of April 7 that since the domestic refined oil price adjustment on March 23, international crude oil prices have experienced significant fluctuations. To mitigate the impact of rising international oil prices on the domestic market, the government continues to implement regulatory measures on refined oil prices. According to the pricing mechanism for refined oil, starting from 24:00 on April 7, the domestic gasoline and diesel (standard grade) prices should each be increased by 800 yuan and 770 yuan per ton, respectively. After regulation, the actual increases are 420 yuan and 400 yuan.

This is the second time the government has intervened to regulate refined oil prices since the abnormal surge in international crude oil prices caused by the conflict between the US, Israel, and Iran, ensuring stable economic operation and social livelihood. Previously, during the price adjustment window on March 23, the domestic gasoline and diesel prices, based on the current pricing mechanism, should have increased by 2,205 yuan and 2,120 yuan per ton, respectively. After regulation, the actual increases were 1,160 yuan and 1,115 yuan. This is the first regulation since the implementation of the current pricing mechanism for refined oil in 2013. The roughly halved actual adjustment will effectively ease the upward pressure on end-user oil costs.

A search of the current “Oil Price Management Measures” by The Paper found that gasoline and diesel prices are adjusted every 10 working days based on changes in international crude oil prices. When the overall domestic price level rises significantly or major emergencies occur, or in cases of abnormal fluctuations in international oil prices, the National Development and Reform Commission can, with approval from the State Council, suspend, delay, or reduce the adjustment scope of prices. After the special circumstances end, the adjustment of refined oil prices will continue to follow the rules set out in this measure upon approval from the State Council.

After U.S. President Trump increased threats to attack Iran’s civilian infrastructure, international oil prices continued to rise on April 7. As of the time of writing, WTI crude oil futures rose by 2.29%, to $114.98 per barrel; Brent crude oil futures increased by 1.40%, to $111.31 per barrel.

The international crude oil spot and futures markets have become divided. On April 2, during trading, the spot Brent crude oil price once surged to $141.37 per barrel, a new high since the 2008 financial crisis, with the spot and futures price gap widening to about $34. Although the benchmark Brent futures price remains below the level at the outbreak of the Russia-Ukraine conflict, the spot Brent reflects shorter-term, more immediate delivery prices. This indicates that while the futures market is still influenced by “verbal interventions” from the US and Iran, the spot market is already pricing in scarcity.

Recently, International Energy Agency (IEA) Director Fatih Birol warned that if the Strait of Hormuz is not reopened for shipping, the amount of lost crude oil and refined products in April will be twice that of March. Even if the conflict ends, it will take a long time to return to normal. “We are tracking all critical energy assets in the region hourly,” he said, referring to oil and gas fields, pipelines, refineries, and liquefied natural gas terminals. “Currently, 72 energy assets are damaged, with one-third severely or very severely damaged.”

If international crude oil prices continue to rise sharply in the future, what other regulatory measures might the government take? To stabilize supply, the government may implement some fiscal and tax support policies.

Lü Zhichen, Deputy Director of the Price, Cost, and Certification Center of the National Development and Reform Commission, previously explained that the current domestic refined oil pricing mechanism sets a price regulation ceiling at $130 per barrel. If the average price of a basket of international crude oil continues to rise significantly and exceeds $130 per barrel, meaning the domestic refined oil prices (average retail price of No. 92 gasoline) would be slightly above 10 yuan per liter, this will trigger the price regulation ceiling. For the portion exceeding the ceiling, the maximum retail prices of domestic gasoline and diesel will not increase or will increase only slightly. To ensure supply stability, the government may also adopt some fiscal and tax support policies. Historically, during the Russia-Ukraine conflict in 2022, which caused a sharp rise in international oil prices, the government explicitly stated that once international oil prices exceeded the regulation ceiling of $130 per barrel, domestic refined oil prices would not be increased in the short term (no more than two months), and refineries would receive phased subsidies.