Late last month China’s powerful National Development and Reform Commission announced a pricing mechanism for refined oil products in an effort to better reflect the volatility in the global crude oil market.

The system truncated the price adjustment period from 22 working days to 10 working days and removed a 4% floating band for oil price changes.

It also changed the grades of crude used to calculate the price changes for domestic oil products.

Under the older system, introduced in 2009, domestic fuel prices were adjusted when prices for Brent, Dubai and Cinta crude altered by more than 4% over 22 working days.

The idea was to shift domestic prices closer to the actual costs incurred by domestic refiners, based on international oil price fluctuations.

It became doubly important as China’s crude imports rose from 30% of its total needs in 2000 to just below 58% last year.

However, with the pricing tweaks largely under state control, the system worked well only under certain conditions – first when oil prices were very high at around the $US100 a barrel mark and when China did not have run-away inflation.

For much of 2011 Chinese inflation was at record levels and the government, worried about a potential economic hard landing, chose to keep the lid on prices.

It resulted in refiners absorbing huge losses, cutting down production and the likes of Sinopec posting huge losses.

Equally, critics also have argued that the long adjustment period allowed retailers to profiteer by hoarding oil products when international prices registered large rises and selling them after government price adjustments.

With the new system shortening the adjustment period, it is hoped international prices will be more accurately reflected in domestic pricing.

That said, the pricing policy is thin on details.

It does not specify the formula that will be used to adjust prices.

It also does not clarify what crude grades will be used in the reference basket, instead saying the NDRC will make adjustments based on the import slate.

Much of China’s crude imports are pegged to Dated Brent and Middle Eastern grades from Oman and Dubai.

In 2012, China’s imports from the Middle East averaged about 2.7 million barrels per day followed by African cargoes totalling around 1.3MMbpd out of a total of 5.43MMbpd of imports.

Analysts say that with China’s imports tipped so heavily towards crude from Middle East and Africa, Dated Brent and Dubai crude will continue to be in the reference basket.

Others say that equally unclear is what the pricing reform is likely to do to the broader energy picture, especially to domestic demand.

While China’s projected oil consumption is slated to go up, a market-based approach to pricing may result in some demand destruction.

The oil pricing reform is likely to be followed up by similar ones for pricing coal, natural gas and electricity sectors.

Many say a market-based approach to resources pricing could push the Chinese economy towards a greener and potentially sustainable growth path.

What that could do to oil and gas supply side is anyone’s guess.