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High kickbacks: Would prices at gas stations increase this winter?

Author : Olena Holubeva

Source : 112 Ukraine

As a result of strengthening the hryvnia exchange rate, prices for gasoline and diesel fuel in retail chains began to decline
12:08, 20 December 2019

Open source

As a result of strengthening the hryvnia exchange rate, prices for gasoline and diesel fuel in retail chains began to decline - since the beginning of December, they were downed by an average of 1,1 cents/liter, and in large chains by about 4 cents/liter. The Cabinet of Ministers requires a more radical reduction - Prime Minister Oleksiy Honcharuk said that now we have the potential to reduce gasoline price by at least another 8 cents/liter.

The fuel networks claim that there are serious reasons for the lack of such a significant reduction in prices, as consumers and the government expect from them. But experts believe that provided that the hryvnia exchange rate remains unchanged, one can expect a decrease in prices by another 6 cents per liter for gasoline and diesel fuel. Autogas, which has risen in price in November-December, will also become cheaper. But this would happen under the influence of exclusively market factors: today the government does not have mechanisms and tools to put pressure on market participants, and they understand this very well.

Related: Geography of diesel fuel supply to Ukraine: Dependence on Russia is quite strong

Government is not happy with slow price cuts

Since the beginning of December, the average price of diesel fuel and gasoline in Ukraine has decreased by 1,1 cents/liter, and in large chains, in particular with OKKO and WOG, by 1-1,1 cents/liter, A-95 Consulting Group reports. “The decrease in prices is a consequence of the strengthening of the hryvnia. Since the Ukrainian gasoline market is filled up to 50% due to import supplies, it is not surprising that gasoline is getting cheaper,” Mykhailo Kalyukin, correspondent of Argus Oil Products of Ukraine, explains. Fuel pricing depends on three key factors - purchase prices, tax burden, and exchange rates. The aggregate stocks of the product and logistics have an additional impact, the OKKO press service said.

It is noteworthy that the hryvnia has significantly strengthened since October, but automobile fuel prices in retail chains began to decline only from December 5. Prior to that, they have remained stable since the summer, Enkorr outlet reports. As of early December, the average price of A-92 gasoline was 1,18 USD/l, A-95 – 1,23 USD l, diesel fuel  – 1,20 USD/l. According to the latest data, the average price of A-92 is 1,17 USD/ l, A-95 – 1,21 UAH / l, and diesel fuel  – 1,18 USD / l. In other words, the dollar is not 26, but 24, and there is no drop in auto fuel prices.

The situation outraged senior officials. Minister of Economic Development, Trade, and Agriculture of Ukraine Tymofiy Milovanov has made a statement that the high cost of gasoline is a challenge for Ukraine. “The statistics of the day and the problem of the week, and possibly the month. The sellers increased the margin of A-95 gasoline from 8% to about 21 % over the year. In my opinion, this is a bit much. The course is increasing, inflation is decreasing, and fuel prices are not falling. The ministry is studying the situation and will take all possible actions in full accordance with the law, "he wrote on Facebook. The other day, Prime Minister Oleksiy Honcharuk said that, according to government estimates, the retail price of gasoline and diesel fuel should fall "by almost 8cents/l." "Now we are observing that gas prices are decreasing. According to various estimates, from 1,1 to 2,8 cents. Of course, this is an inadequate decrease, of course, gas prices should decrease much more. According to our estimates, they should decrease by almost 8 cents," Honcharuk noted.

Related: Ukrainian court refuses to arrest vessel that carried fuel for Russia's Black Sea Fleet

On December 5, the Antimonopoly Committee sent binding recommendations to retail chain operators on reducing prices for high-octane types of gasoline and diesel fuel. The recommendations were sent to WEST PETROL MARKET (brand WOG), OKKO-RETAIL (brand OKKO), Ukrnafta (brand UKRNAFTA), AMIK Ukraine (brand AMIC Energy), Alliance Holding (brand SHELL), SOKAR PETROLEUM (SOCAR brand), Ukrpaletsystem (UPG brand), and Glusko Retail (GLUSCO brand). The committee reported the following calculations: the average prices of large wholesale for A-95 gasoline and diesel fuel fell by almost 20%; the US dollar to the hryvnia, which may affect pricing, given the import dependence of these markets, decreased by almost 12%; but at the same time, average retail prices for A-95 gasoline and diesel fuel fell by 5-5.6%. The level of retail prices for A-95 gasoline and diesel fuel at stationary gas stations of the main market participants (operating under the WOG, OKKO and UKRNAFTA brands) remained almost unchanged, the AMCU emphasized.

Fuel retail networks: Nowhere else to reduce

Fuel networks cannot respond to the depreciation of the dollar day to day, as they buy it with a margin. For this reason, the reduction in prices at gas stations did not begin immediately, but as stocks purchased at a high dollar were washed out, Oleksandr Melnychuk, the director of the strategic marketing department of BRSM-Nafta, noted.

After Milovanov’s statement, representatives of fuel retailers had two meetings at the Ministry of Energy and the Environment — one meeting was held by Minister Oleksiy Orzhel himself and the other was organized by his deputy. “In general, the issue of pricing was discussed,” Melnychuk said.

Indeed, shadow straits provoke a real catastrophe, says A-95 director Serhiy Kuyun: “What is happening? The state cannot protect normal players from illegal flows. Sales volumes flow from civilized players to them because of the low price. The business is forced to increase its margin so that with falling sales volumes continue to maintain the infrastructure and not reduce the level of service.” Kuyun previously noted that due to the "optimization" of costs when working without a cash register and without observing a number of legal norms, illegal stations have the ability to trade at the cost of legal networks.

Related: Ship, which supplies fuel for Russia's Black Sea Navy Fleet, searched in Kherson

He cited figures that the only successful raid on illegal entities in the Rivne region showed that there were about 30% of such stations. In response to the reduction in sales as a result of the shadow in 2019, retail margins in Ukraine increased by 7–10 cents per liter for gasoline and diesel fuel, respectively.

“I’m sure that the process of lowering gas and diesel prices will continue, the potential is still somewhere around 6 cents/liter. If the hryvnia exchange rate remains unchanged, in general, we will go through the winter with low prices,” said Kuyun. Representatives of networks restrainedly comment on the issue of the potential for further reduction. Oleksandr Melnychuk explained that the networks of the economic segment have a much smaller margin for reduction than the networks of the premium segment: “If our currency exchange remains at the level of 23.6 UAH/USD, our network will be able to reduce prices by another 0,3 cents per liter.” "It is difficult for us to predict the price dynamics for the future since world quotes for oil and, accordingly, oil products are a rather volatile category," OKKO press service reports.

Experts say that at least gas station prices should not rise yet. Mykhailo Kalyukin from Argus notes that the situation might change if external factors change, for example, quotes in Europe or a dollar appreciation: “Another factor may be an increase in demand for petroleum products in the pre-holiday period, but so far all companies have sufficient stocks of products, there’s no shortage so far.”

Autogas (LPG car fuel) will also reduce in price

Amid falling prices for gasoline and diesel fuel, gas, which is traditionally a cheaper alternative to traditional petroleum products, has shown growth. Ukrnafta also announced the threat of stopping its gas processing plants. However, the other day the issue was unlocked and auctions resumed.

Related: Supplies of fuel from Russia to shorten twice after imposing of duties

A sharp jump in prices did not occur due to the high stocks of gas imported from abroad, as well as due to the low consumption season, explained Artem Kuyun. According to him, if the situation with the auctions had not changed, the price of gas stations could have risen to 60 cents/liter. But if such a situation were in the summer, prices could well have jumped to 65 cents/ l. “After the resumption of auctions, the price of gas should be expected to roll back,” Kuyun explained.

In the future, legislative decisions will have a major impact on alternative gasoline fuel. As we reported, some MPs from the Servant of the People, associated with Ihor Kolomoysky’s Privat group on the market, suggest changing the excise tax policy on gasoline and gas. If the legislative initiative in its current form is adopted, according to experts, traditionally considered social and affordable, auto fuel can go up by 8-10 cents/liter, while gasoline will become cheaper. The amendment of MP Olha Vasylevska-Smaglyuk (Servant of the People), which was a journalist at 1 + 1 TV channel, owned by Igor Kolomoysky, was already considered twice in the Verkhovna Rada’s room and was not approved. On December 18, only 66 MPs voted for it (with the 226required). Bill No. 2317 (without this amendment) was adopted in the second reading and as a whole. 316 MPs voted for this decision.

PJSC "Ukrtatnafta" (Kremenchuk refinery), which is called the main lobbyist of the legislative amendment, has publicly supported the introduction of a single excise tax rate on gasoline, gas and diesel fuel at 139.5 EUR per 1000 liters. This is stated in the press release of the company, published on its website after voting in parliament for bill No. 2317. Another factor in rising prices could be the introduction of duties on gas supplies from Russia, which account for almost 43% of total imports product. Officials are discussing the possibility of introducing such an initiative in 2020, Argus reports. If implemented, both initiatives can become factors in price increases.

In any case, exclusively market factors and legislative initiatives will determine the price of the auto fuel market in Ukraine. The times of tough state regulation remained in the distant past, and now, according to experts, the authorities do not have a single tool with which they could force market operators to act contrary to economic feasibility. Almost all the fines that were issued to retail chains by the Antimonopoly Committee, accusing them of allegedly synchronous increase in fuel prices, were challenged in court: a number of processes are still ongoing.

Related: Six EU member countries demand that Russia release Ukrainian sailors, stop adding fuel to Donbas conflict

“Thank God, the current government understands that putting ultimatums and putting pressure on business is wrong. Our communication takes the form of an open dialogue in which everyone expresses his position, shares the problematic issues that exist. We have talked about what could be options so that one side hears the other,” Melnychuk said.

However, what is good for the fuel business is not always good for ordinary consumers. While the dialogue lasts, they pay for the opportunity to travel by car with their own money.

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