Internal Combustion: How Can Russian Fuel Prices Change in 2019

In Russia, from January 1, 2019, excise taxes on gasoline increased from 8213 rubles to 12,374 rubles per ton, for diesel - from 5665 rubles to 8541 rubles per ton.

The increase in excise taxes coincided with an increase in VAT from 18% to 20%. Experts do not exclude that increased fiscal burden may lead to the fact that fuel sellers will raise prices. A similar opinion is held in the Accounts Chamber of Russia.

"The increase in excise tax by one and a half times from January 1, 2019 may again lead to a sharp increase in gasoline prices and require additional compensatory and restraining measures," the federal auditors' opinion on the draft budget 2019-2021 says in October.

Russian President Vladimir Putin during a big press conference on December 20, admitted the possibility of some price increases in early 2019, associated with an increase in VAT. According to the head of state, the adjustment will be about 1-1.5%.

Recall that in November 2018, the government and oil companies signed an agreement on measures to stabilize the situation on the fuel market. The terms of the agreement allow oil companies to raise prices at gas stations in January to compensate for the growth of VAT, but not more than 1.7%. Since February, an increase is possible only within 4-5% - the average level of inflation in the country.

Double freeze

In 2018, the government twice negotiated with the oil companies about freezing the price of gasoline, and the meeting took place every time after a noticeable increase in the cost of fuel at the gas station.

The first significant price surge occurred in April and accelerated in May, when during the month fuel rose in price by 5.6%. Since June 1, the Cabinet of Ministers has reduced excise taxes on gasoline by 3,000 rubles per ton and on diesel by 2,000 rubles. The government also canceled the planned increase in excise taxes by 700 rubles from July 1. At the same time, the authorities convinced the largest oil companies to fix the cost of fuel at gas stations at 30 May.

As a result, the average price of gasoline in Russia decreased from 43.43 rubles per liter in early June to 43.21 rubles by the beginning of September.

However, in the first month of autumn, the price of the gas station again went up. According to Rosstat, from September 17 to November 5, the average cost of gasoline added 25 kopecks, and diesel - 75 kopecks.

“The rise in retail prices in 2018 is due to an increase in wholesale prices. Those, in turn, grew up against the background of a shortage of fuel in the domestic market, which was formed due to the attractive conditions of supply abroad. In fact, companies sent most of the fuel for export and only a small amount was left for the domestic market, ”Anna Kokoreva, deputy director of Alpari’s analytical department, noted in an interview with RT.

Alexey Kalachev, analyst at FINAM, JSC, believes that the main reason for the increase in fuel prices last year was the increase in the ruble price of oil.

“The cost of raw materials for oil refineries is up to 80% of the cost of production and up to 40% of the retail price of motor fuel. Previously, the growth of oil prices was offset by the appreciation of the ruble, and the price of raw materials for plants remained almost unchanged. In 2018, the oil market had two periods of strong price growth, but at the same time, due to sanctions, the ruble fell. Therefore, in spring and autumn, the prime cost of gasoline production rose sharply, and wholesale and retail prices went up behind it, ”explained RT Kalachev.

On October 31, the government agreed with Russian oil companies to fix wholesale prices for gasoline and diesel at the level of June. Oilmen also pledged to increase the supply of fuel to the domestic market. The agreement is valid until March 31, 2019.

November 12, Deputy Prime Minister Dmitry Kozak said that the situation on the oil products market has stabilized. According to the deputy chairman of the government, prices are frozen and will remain until the end of March 2019, taking into account inflation and changes in tax legislation.

According to Rosstat, the cost of gasoline from November 5 to December 17 decreased by 3 kopecks. Retail prices for diesel for the same time increased by 1.34 rubles, but experts explain this jump by switching to winter fuel, the cost of which is always higher.

Export collapse

The decline in world oil prices at the end of 2018 created favorable conditions for the sale of gasoline in Russia. In November, the cost of fuel on the domestic market became equal to foreign supplies, and in the middle of December it became more profitable to ship gasoline domestically than to export. This is stated in the presentation of the Deputy Minister of Energy Pavel Sorokin, which leads TASS.

The president of the Russian Fuel Union, Yevgeny Arkusha, noted that at the end of 2018, gasoline supplies to the domestic market brought in 7-8 rubles per liter more than abroad.

“Immediately there were huge amounts of fuel sales on the exchange. Our market is now filled with gasoline, thanks to which its wholesale price has gone down. Retail prices as they were, and remained frozen. Taking into account that the entire 2018 gas station worked with losses, it is unlikely that someone will now start lowering prices strongly - we must compensate for the previous expenses, ”Yevgeny Arkusha told RT.

According to the expert, now the situation with gasoline on the Russian market has stabilized. However, the volume of winter diesel produced is not enough to meet the needs of the country. Previously, fuel was partially replaced by surrogates. They struggled with low-quality fuel, and as a result, they got rid of it, but it was not possible to replace the required amount. As a result, the difference in the wholesale prices of winter and off-season diesel engines significantly exceeded the usual level.

Taming the fuel

Since January 1, the law on the completion of the tax maneuver came into force in Russia. It involves a gradual increase in the mineral extraction tax (MET) over a period of three years. At the same time, for six years, export duties on oil and oil products will be reduced to zero.

Since the zeroing of duties can cause a rise in the cost of fuel within the country, the maneuver contains two mechanisms to contain prices. The first is the reverse excise tax on oil supplied to Russian refineries. The second is a damping excise tax, which takes into account the profitability of exports of petroleum products. If the sale of fuel in the country turns out to be less profitable than sending it abroad, the government will compensate Russian producers for part of the costs.

Earlier, Dmitry Kozak said that thanks to price control mechanisms, the government does not expect a sharp rise in the cost of motor fuel from January 1, 2019.

“To date, nothing needs to be compensated, domestic prices are already very good. Hopefully, the overall damper will work as intended, and this will stabilize prices. The agreement is valid until March 31, that is, a whole quarter is allotted to work out the appropriate mechanisms, ”notes Evgeny Arkusha.

The government is considering another option to contain gasoline prices — the introduction of flexible excise taxes on motor fuels. They will be inversely related to oil prices. For example, when raw materials become more expensive, the size of excise taxes will decrease. It is currently fixed and does not depend on the cost of oil.

Aleksey Kalachev believes that if the input cost of raw materials for refineries changes under the influence of the global market, then the output needs a flexible element: either the changing cost of gasoline with constant excise taxes, or frozen prices with flexible excise taxes.

Yevgeny Arkusha said that the authorities are discussing with representatives of the industry and other options for saturating the Russian market.

“The most important task is to make the domestic market economically more attractive than the external one. Then all problems will be removed. Fuel prices will rise only due to inflation and rising operating costs, and this is not significant, ”Arkusha states.

In search of diesel

Experts interviewed by RT believe that at the beginning of 2019, with low oil prices, large companies will keep gas station prices within the limits set by the government.

“A correction to the amount of VAT will not be avoided, and a permitted increase of 1.7% is enough for this. So, fluctuations in fuel prices at the beginning of the year are possible, but within the framework of the approved one, ”says Anna Kokoreva.

Kokoreva allowed the option in which the prices at gas stations will not change until the end of March and after the cancellation of freezing will begin to rise again.

Independent gas stations did not sign the agreement, but for them the price tags at petrol stations of oil companies serve as a guideline. Earlier, the cabinet determined that independent players can set prices 4% higher than oilmen.

“Because of the high wholesale cost of fuel and the inability to operate at a loss, independent gas stations kept prices higher in 2018, sometimes by 4–5 rubles per liter, losing sales volumes. Now, as wholesale prices fall, independent gas stations reduce retail to the level of large companies, ”said Yevgeny Arkusha.

Arkusha also believes that the cost of diesel fuel will rise in January, because it is not enough. With gasoline, things are much better, so there may not be a price increase.

“The high price of gasoline and diesel in the conditions of cheap oil creates a certain margin for sellers. It will allow relatively easy to experience a further increase in excise taxes. If new circumstances do not appear, I believe that retail prices will be able to be kept at the current level at least until the summer, ”concluded Alexey Kalachev.