What is the benefit of the oil embargo?
The European Union (EU) countries could not reach a consensus on the oil embargo to Russia. The measure was not included in the sixth sanctions package due to Hungary. After that, the EU wanted to persuade Budapest with financial compensation. In addition to Hungary, Slovakia and the Czech Republic are also heavily dependent on raw materials from Moscow.
The oil embargo has more than negative consequences for Russia. On the one hand, the export volume of raw materials decreases, on the other hand, it can be sent to Asia or the domestic market. Grigory Bazhenov, head of the analytical center of the Independent Fuel Association (NTS), said in an interview with socialbites.ca that the latter in particular will lead to a glut in gasoline supply.
“Fuel prices should drop somewhat, unless regulatory changes are made in Russia’s domestic market, unless the tax burden is balanced in such a way that trading gasoline in Russia becomes unprofitable due to the added benefits of pumping fuel into Asia. 10-20 kopecks per liter in the coming months,” Bazhenov explained.
Pavel Bazhenov, head of the Independent Fuel Association, agreed with him. According to him, gasoline prices are likely to be lowered by private gas stations. Large vertically integrated companies (VICs), on the contrary, will either seek to freeze the cost of a liter of fuel or prevent a significant drop in prices. The real victims of the initiation of the EU oil embargo will be the VIOCs.
“It is important to understand that the cost of Russian gasoline has limits, no one can lower prices to the ground.
We will certainly not see an increase in the cost of fuel and a decrease of 3-5 rubles per liter. Our average annual inflation has already climbed to 20%, the government will not allow gasoline prices to rise to this level. On the contrary, by the end of the year we can see a decrease in the cost of a liter of fuel by 2-3 rubles in Russia, ”the author said.
Under current conditions, when the domestic gasoline market in Russia is saturated with additional volumes of fuel, competition between private gas stations for the consumer will increase even more. Evgeny Arkusha, head of the Russian Fuel Association, suggested that promotional and loyalty programs for customers at independent gas stations will increase in the coming months.
“Now, fuel is a commodity whose prices are not only rising, but falling as well. Recently, the average cost of a liter of gasoline in Russia has decreased by 15-20 kopecks. This trend will continue. And that’s despite the millions of dollars lost by private gas stations in 2021. Arkusha said that in the face of declining exports, the fight for the domestic buyer will become their top priority.”
At the same time, the expenditure of filling station owners for the purchase of equipment, processing technologies, wages for workers has increased sharply in recent months. Do not forget about the growth of lending rates, in some cases they can reach 20-30%. He concluded that all these factors would not allow the prices of private gas stations to fluctuate freely.
The Russian fuel market is a highly regulated platform. Fuel prices are controlled by the state with a damping mechanism. In other words, the government and federal agencies determine for themselves what price of gasoline is appropriate for the domestic market. Igor Yushkov, one of the leading analysts of the National Energy Security Fund, said that current fuel prices in the region, 47-53 rubles per liter, depending on the brand, are quite acceptable.
“The shock absorber contains an export netback. In other words, if the exporting firm can earn more from its exports to Europe or Asia than to the domestic market, the government returns the missing difference from the budget to the seller. But now the situation has changed dramatically. If previously the Ministry of Energy worked to keep the growth in the cost of gasoline within the limits of annual inflation, in the current situation this task will have to be adjusted – inflation has risen too high, ”complained Yushkov.
He suggested that the Department of Energy would now replace the damper mechanism “on the go”. To avoid unnecessary transfers of Russian oil products from Europe to India and China, the government will need to increase cash surcharges for exporters.
“Companies are not going to completely redirect their loss volumes to the already overcrowded domestic market. Without additional payments, VIOCs would simply reduce production,” Yushkov said.