Higher windfall tax eyed amid oil crunch

PUBLISHED : Friday, 07 December, 2007, 12:00am
UPDATED : Friday, 07 December, 2007, 12:00am

Beijing may have to raise levy on crude producers to increase subsidies for refiners

Beijing has warned high oil prices are making a major impact on the economy in the form of fuel supply shortages, and analysts say it may need to raise the windfall tax on oil producers so it can pay more subsidies to refiners and ask them to raise fuel output.

The National Development and Reform Commission said strong economic growth has seen the mainland's oil consumption surge year by year, with its dependence ratio on foreign crude oil rising to almost half this year.

'High crude oil prices have affected the economy directly as that resulted in an increase in crude costs, which put more upward pressure on domestic refined fuel prices,' it said.

As Beijing suppresses domestic retail fuel prices at well below international levels, refiners have suffered losses amounting to tens of billions of yuan over the past two years.

Beijing started to collect a so-called special oil revenue levy, a form of windfall tax, in April last year and has used it to pay out subsidies to the refining, farming, fishing, forestry and public transport sectors.

The NDRC expects to collect 60 billion yuan of the levy this year, up from 45 billion yuan last year. It has collected some 41 billion yuan in the first three quarters this year.

It paid out 41 billion yuan in subsidies in the three quarters, up from 21 billion yuan last year.

'The special oil tax levy offers one way to finance direct subsidies for both refiners and consumers, which have clearly not been enough,' said Kim Eng Securities analyst Larry Grace. 'Beijing now faces choices that include giving away more subsidies financed by an even higher oil tax levy or more discounted domestically produced crude.'

He said refined fuel demand appeared to have risen despite a nearly 10 per cent price rise early last month due to hoarding by distributors.

In mid-November, the retail price of mainland petrol stood at 5.3 yuan a litre, 18.4 per cent lower than 6.5 yuan in the United States and at a 61.5 per cent discount to the 13.8 yuan in Hong Kong.

Places like Hong Kong, Japan and Europe impose hefty fuel taxes to discourage consumers from driving.

Beijing has been considering for more than a decade imposing a fuel tax to encourage greater fuel economy and using it to replace a road maintenance tax, but divergent interests between local and central governments have hampered the plan.

NDRC's comments came as its Office of the National Energy Leading Group headed by Premier Wen Jiabao and various high-level ministers announced the establishment of a consultation committee comprising 40 mainland industry experts.

The think-tank, chaired by the energy office's deputy head Xu Dingming, is divided into six committees encompassing coal, nuclear and power, oil and gas, renewable energy, energy conservation and energy economics, Xinhua reported.