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China Enforces New Oil Pricing System

| Jan 14, 2016 09:07 PM EST

China has begun implementing a new system to control and prevent further lowering of oil prices.

Chinese authorities have launched a new set of fuel pricing rules in the hopes of maintaining the stability and flexibility of domestic oil prices.

Under the new system unveiled last Jan. 13 by the National Development and Reform Commission (NDRC), price adjustments for domestic oil will only be suspended when international prices fall to $40 a barrel. Meanwhile, the price ceiling was pegged to $130 a barrel.

On the other hand, the NDRC said that the pricing for liquefied natural gas will remain to be solely based on current market prices.

In a statement, the commission said that the new rules are primarily intended to protect the country's energy sector. It explained that a low fuel price would lead to further dependence in external oil as consumers will likely take advantage of the significantly lowered prices, China Daily reported. China currently depends on overseas oil imports for 60 percent of its needs.

World crude prices are currently in a 12-year low, with U.S. crude prices dipping to below the $30 mark on Tuesday before settling at $31.54 a barrel on Wednesday.

The NDRC also expressed concerns that very low oil prices might be a detriment to the country's effort to shift to cleaner energy resources. China has been aggressively pushing for the development of new energy sources as part of its pledge in the recently concluded Paris Climate Change Conference.

The commission added that the savings gained by Chinese refiners from the suspension of price changes brought about by the new rules will be put in newly established funds. These funds could, in turn, be used to finance clean energy projects approved by the government.

Meanwhile, market analysts said that the new rules set forth by the Chinese government will have a significant effect on the flow of oil on the world market, The Wall Street Journal reported. Ivan Szpakowski of Citi Research said that the rules will cause negative net growth on the demand for oil as China is a large chunk of the current world consumption.

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