Gasoline fumes for the government: how to stop rising prices at gas stations

Until the spring of this year, the problem of pricing automobile fuel in our country was not too acute, despite the sanctions imposed by the West against the domestic oil sector.

But everything changed in mid-April. Prices went up first on the wholesale market. For example, wholesale prices on the St. Petersburg International Commodity and Raw Materials Exchange (SPIMEX) in the European part of Russia for AI-92 gasoline increased from approximately 45 thousand rubles. per ton in the first half of April to 70.4457 thousand rubles. September 15th. Growth – by one third. The AI-95 grade has risen in price from 50 thousand rubles. in early April to 76.4 thousand rubles. per ton on September 15. Jump 50%. Similar negative dynamics have developed with summer diesel fuel. At the beginning of April, a ton cost 50 thousand rubles, on September 15 – 73.758. An increase of 46%.

At the beginning of the price rally, both Deputy Prime Minister Alexander Novak and Energy Minister Nikolai Shulginov tried to reassure retail consumers, arguing that increases in wholesale prices would not penetrate gas stations. Price tags there, they say, will not exceed the rate of inflation. At first, such promises inspired optimism. For example, inflation in June in annual terms barely reached 3.14%. If this trend had continued until the end of the year, then retail gasoline prices would not have exceeded 3% in 2023. Which is, of course, quite tolerable.

However, according to Rosstat, by September 11, annual inflation reached 5.5%. Moreover, by raising the key rate to 13% on September 15, the Central Bank raised the inflation forecast for the rest of the year to 6–7% instead of the previous 5–6.5%. So, even within the limits of inflation, gasoline prices will rise much faster than the Cabinet promised several months ago. In addition, fuel indicators, in turn, spur an overall rise in prices.

Moreover, the wholesale curve has nevertheless grown into retail. According to Rosstat, the cumulative increase in the retail price of gasoline from the end of December 2022 to September 11 amounted to 8.5%, and diesel – 7.3%. And this is much higher than both accumulated inflation (3.9%) and calculated in annual terms.

On September 12, President Vladimir Putin tried to reassure fuel consumers at a plenary meeting of the Eastern Economic Forum. He assured that the government has been dealing with the problem of gasoline prices for a long time. But not entirely successful. The Cabinet of Ministers, according to Putin, did not respond to this situation in a timely manner. However, now everything is getting better. The government and manufacturers have already allegedly agreed on joint actions: “The tools are known, there are agreements, I hope that this will be reflected in the real state of affairs.” But it seems that the president was hasty with a positive forecast.

The fact is that the Russian government is faced with an extremely complex and therefore intractable task. Automotive fuel prices are driven up by several closely related factors. First of all, the export of gasoline and especially diesel fuel is becoming more and more profitable for domestic oil companies compared to domestic sales. According to calculations by Alexey Belogoriev, Deputy Director for Energy at the Institute of Energy and Finance, the export of diesel fuel is now approximately 40% more efficient than supplies to the domestic market. The reason is a certain shortage of diesel in foreign markets, especially in the European Union. On February 5 of this year, following the embargo on Russian crude oil introduced back in December last year, a ban was announced on the import of Russian petroleum products. These sanctions were also reinforced by price ceilings on the transportation of our oil products to other countries. The EU did not have enough of its own diesel fuel even before the restrictions. And, for example, this year oil refining at the refinery in the East German city of Schwedt, which previously supplied the northern branch of the Druzhba pipeline, has almost completely stopped. After a noticeable decline in prices for motor fuel in a number of EU countries at the end of last year, they again began to return to their previous high positions. In September, on average, diesel fuel in the EU is approximately three times more expensive than in Russia, and gasoline is 2.5–3 times more expensive.

At the same time, supplies of the Russian Urals crude oil are significantly less efficient than before the start of the SVO. At the beginning of this year, discounts compared to the benchmark Brent reached $35–38 per barrel. By July, the situation with cost gaps had improved. The average discount has dropped to $13–15 per barrel. At the same time, oil prices on the world market increased significantly – in mid-September they exceeded $94 per barrel. Whereas in March and early April they immediately fell to $71–72. Large-scale OPEC+ measures to limit exports had a positive impact. The income of Russian vertically integrated companies has, of course, increased. The amount of taxes has also increased. In July, according to the Ministry of Finance, oil and gas budget revenues exceeded last year’s figure by 5%.

However, oil companies, especially small ones, have to take full advantage of the favorable moment. Analysts at the world’s largest oil trader Gunvor predict a sharp drop in oil prices in December-January.

The domestic Ministry of Finance also spurred up domestic prices for petroleum products. In May, the ministry warned that in September the size of the damper for domestic refineries, which has been paid since 2019 as part of a tax maneuver in order to reduce exports, will be halved. In July, this decision was approved by the State Duma. And although, according to some data, in August the damper reached a record level – up to 159 billion rubles, and this led to a certain containment of gasoline prices, in September domestic refineries will receive no more than 30 billion rubles. This means that all types of exports – and especially “gray” – will actually increase.

And all external conditions are ripe for this. Firstly, there was a noticeable reorientation of supplies from the West to the East. Secondly, Russian diesel continues to easily overcome European barriers through India, Turkey and Morocco.

The rise in domestic prices is also supported by a sharp drop in the exchange rate of the ruble, since imported components, such as additives, are still used in the production of gasoline. Logistics problems also worsened in September. The previous volumes of supplies, especially diesel fuel, are not enough, including due to growing demand from farmers and the military.

It is not so easy for the government to cope with this host of problems. Most industry analysts believe it’s simply not possible. The budget will remain significantly deficit until at least 2025. There is no other “cash cow” other than oil and gas in sight. And the industry will continue to try to earn at least a little money from domestic consumers.

Nevertheless, the government is trying to find a way out. Since August, by decision of the State Duma, the percentage of exchange sales of gasoline and diesel has been increased from 12% to 13%.

At the end of July, Chairman of the State Duma Committee on Energy Pavel Zavalny proposed abandoning the tax maneuver based on the abandonment of export duties by 2025 in favor of increasing the mineral extraction tax and introducing an added income tax. The Ministry of Finance believes that it is more profitable for the budget to skim the cream off all oil supplies, and not just export ones (on average, a third of the oil produced is exported from the country).

Therefore, Zavalny’s proposal was met with skepticism in the government, as was the Ministry of Energy’s proposal to reduce the number of exporters. This was already done in the 1990s, which only led to an uncontrolled increase in corruption.

However, on September 15, the government held a meeting to curb oil product prices. Sources report that it is still proposed to temporarily introduce protective duties on the export of gasoline and diesel. Whether the government dares to do this will become clear soon. However, whether such a measure will help maintain price tags at gas stations is not entirely clear. Because stopping “gray” exports is not so easy.