Price Control: A Looming Obstacle to Refining Capacity Additions in Asia Pacific

The center of gravity in Asia Pacific refined product demand has clearly shifted to regulated markets, most notably China and India . Combined with other markets currently under some form of price control, over 90 percent of Asian demand growth since 2003 has taken place in markets where product prices are regulated. This demand growth shift to regulated markets raises the question of how responsive Asia Pacific demand and supply are to global market signals.

* In many of Asia's growing regulated markets, prices for gasoline, jet/kerosene, and distillate-the principal light products-are substantially lower than international market parity, preventing global price signals from fully reaching consumers and suppliers.
* The rise in international prices over the past two years has generated a mounting subsidy burden in markets where prices are controlled and is reason for concern for governments, refiners, and consumers alike.
* CERA sees a vicious cycle taking place. The widening gap between regulated prices and international parity creates downward pressure on refinery margins-especially for oil importers. These lower margins reduce the incentive for needed local capacity investment, bolster margins in the international market by increasing import requirements, and further exacerbate the existing subsidy burden.

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CERA Reports Online, a wholly owned subsidiary of IHS Energy, is a leading advisor to international energy companies, governments, financial institutions, and technology providers. CERA delivers critical knowledge and independent analysis on energy markets, geopolitics, industry trends, and strategy. CERA's expertise covers all major energy sectors--oil and refined products, natural gas, and electric power--on a global and regional basis.