Golden gasoline of Russia

30.06.2011 — Analysis

Gasoline is never going to be cheap in Russia. Experts are sure in this, pointing out that its price is tightly tied to the world price for oil - every price jump hits Russian car owners in the wallet. Furthermore, in pursuit of super-profits oil companies pour fuel on price "flames". Staying on alert so that these flames would not spark anger of Russian people and turn it into wild fire, the government from time to time regulates "manually" fuel prices. The gasoline price may go down for a while, but soon after prices again shoot up. The "RusBusinessNews" reporter realized: they cannot be brought to stop, but it is quite possible to curb wild fluctuations and hedge the domestic market against gasoline deficit. However, to do this, the government authorities will have to cut off the "oil umbilical cord".

How gasoline evaporated

Oil companies have been intimidating the Russians with fuel deficit for quite a few years. At the beginning of April in 2011, their threats came again into being - gasoline was disappearing or becoming very expensive in more than ten regions of the country. The most aggravating situation was observed in the Altay District, Belgorod, Voronezh, Kemerovo, and Tomsk Regions, Tuva and Vladivostok. According to the Russian Fuel Union, disruptions in fuel supply took place in St. Petersburg, Novosibirsk and Sakhalin.

In these regions, some gas-filling stations limited their sales to not more than 20 liters per a person, and, for example, in Tuva the price for one liter of the most popular Ai-92 fuel increased up to 50 rubles. Independent filling station chains, complaining that wholesalers refuse to sell fuel to them, began to "wind hoses down". As a result, filling stations, which belonged to large oil companies, actually turned into fortresses besieged by car owners - their supply was not enough to meet such demand.

The fuel crisis is cooked from several ingredients. Experts assume that rising oil world prices constitute the main reason that triggers the growth of gasoline prices. From October 2010 to May 2011, the price of a barrel of oil increased by 50%. In this context, this February, by the order of Prime Minister Vladimir Putin, Russian fuel producers decreased prices slightly. Concurrently, since January excise taxes for gasoline and diesel fuel have almost doubled.

Actually, it is more profitable for oil companies to sell crude oil to Europe where it will be turned into high-quality and expensive gasoline, instead of producing such gasoline for Russia. Taking advantage of the situation, they increased crude oil exports almost by 50% in the first quarter of 2011 (by 600 thousand tons against the respective period in the previous year). It was backed up by the ban on production and sale of Euro-2 gasoline; the ban took effect in January 2011. With reference to the VNIPI-neft Institute (The Scientific Research and Engineering Institute of Petroleum Refining and Petrochemical Industry), Russia produces not more than 40% of high-quality gasoline and about 30% of fuel oil of the total amount (twice as large as the USA and Europe). Many companies did not have enough time to upgrade their refineries for production of Euro-3 and Euro-4 fuel. Maria Belova, head of the Energy Department of the Institute of Energy and Finance, admits that oil producers could intentionally increase production of low octane fuel.

In the mean time, the domestic demand for gasoline has increased significantly, due to seasonal factors and due to the increased number of cars. Experts point out that as of today, the Russian car fleet ranks second among European countries in the number of vehicles.

However, in the opinion of Pavel Strokov, the director for development at the Kortes Information and Analytical Center, there were not any objective pre-conditions that would provoke deficit. He draws attention to the fact that supply disruptions took place in the regions with many independent filling stations. Oil giants supplied their own filling stations seamlessly, and there was no deficit in those Russian entities where they run the show.

Recipe for fight against skyrocketing prices

Analysts note that Russia is the only country that experiences "gasoline" problems, while having rich oil fields. For example, in Kuwait and Qatar, gasoline costs about 20 US cents, in Saudi Arabia - about 10, and in Venezuela and Turkmenia car-owners pay not more than 80 kopecks for one liter of gasoline, if translated into rubles. However, gasoline prices cannot be as low - they are maintained due to government subsidies to petroleum producers. The governments of these countries spend billions on petroleum subsidies in order to ensure security of the political system.

Russia has its own way. Natural resources, including petroleum products, account for the lion's share in the Russian exports; therefore, the government uses its best efforts to "feed" the budget with a large excise-tax piece of petroleum cake.

According to the Institute of Energy and Finance, taxes account for half of the gasoline price. The production, including oil extraction, accounts for not more than 30% of the price, the remaining part is the profit of companies. As a result, oil giants have good profitability, while consumers have to loosen their purse strings to buy expensive gasoline.

Russian oil companies are very satisfied with this situation. Igor Artemiev, head of the Federal Anti-Monopoly Service, thinks that it was they who instigated the fuel crisis of 2011 году, blackmailing the government in retaliation for its attempts to take control of rising prices. After inspection of regional subsidiaries of oil monopolists, the Federal Anti-Monopoly Service brought 52 lawsuits in April-May.

The government authorities decided to put a halt on deficit by banning oil producers from fuel export operations. In May, 2011, the export duties on gasoline were increased by 44% - up to 408.3 US dollars for one ton as compared to the previous month. On June 1, they went up to 415.8 dollars per ton, but in July they will go down to 400.5 dollars. Besides, the government intends to give permission to continue production and sale of Euro-2 gasoline.

In the opinion of Sergei Vakhrameyev, a senior analyst of the Metropol Investment and Financial Company, the government measures will make oil producers increase gasoline supplies to the domestic market, but will not be able to check the growth of prices tied to the world oil price quotations. He anticipates that at the end of 2011 gasoline prices will increase by 8-10% on average in Russia.

In addition to urgent actions, the Federal Anti-Monopoly Service is calling for demonopolization of the industry. The Service offers to adopt the law that would forbid vertically integrated companies to extend their filling station chains, if their regional market share exceeds 35-50%. In addition, the anti-monopoly agency wants to compel oil giants to give about 15% of their refinery facilities to independent oil producers for operation. The RF Energy Ministry is even thinking about allotting an entire factory for them.

However, experts think that it will be of no use. Pavel Strokov points out that oil companies - owners of refineries will never agree to give away even part of their facilities. They will invent any covenants to get rid of uninvited "guests". If independent companies receive an entire factory, they will have nothing to put into it. According to the Association of Small and Medium-Size Oil and Gas Producing Organizations of Russia, the "little ones" account for not more than 4% of the total oil production in Russia.

There is also no sense in limiting the share of the retail market, as independent traders still buy fuel from oil giants. If the giants do not sell gasoline to them, gas-pumps will stay empty.

The only way out is to make companies give part of their oil to private operators for sale. But no one will dare do that. By estimates of Sergei Shmatko, the RF Energy Minister, in 2010 companies operating in the oil industry brought 52% revenue to the federal budget.

The government has very strong connection with petroleum empires. However, any further fuel crises and price jumps can be prevented only through fundamental measures. The symptomatic treatment of the Russian "gasoline disease" is not efficient. Experts point out than the country cannot subsidize oil production; however, the government can set the rules of game, which, on the one hand, would protect the domestic market against fluctuations of the world oil prices and, on the other hand, would establish sound competitive environment for petroleum producers.

"Consumers should not be responsible for the situation on the world markets. Other countries understand this. In such times, our taxes must render support. The Federal Anti-Monopoly Service advanced the initiative, urging to decrease excise taxes when world prices for oil start increasing, so that to cap our prices. I think it is right", - says Pavel Strokov. According to him, first of all, in the taxation system, the mineral tax should be tied off from the world prices for oil.

During the electoral season of 2011-2012, the Kremlin most likely to use a "stick" to constrain oil producers; however, after the Russian president is elected, the latter will want to have a "carrot". Russian consumers will not be able to stock gasoline up for future use. They are unlikely to increase their incomes. So, the only way they can fight prices is to use their cars less, but it is exactly what they are not willing to do. Russia will not be able to escape the gasoline noose.

Irina Rusakova