In the United States, petrol prices have fallen for the fourth successive week at a fairly high pace, about 4% a week. This month they hit a five-month low. Americans say this is a normal thing: the summer is over, so demand for fuel has declined. In Russia, however, the situation is different.
Year after year, Russia witnesses a hike in petrol prices in September, although the demand for it falls, just like in other countries. Moreover, this year's price increases in August and then in September oddly coincided with another unusual, non-seasonal factor: crude prices have been dropping fast since August. The price of a barrel has dropped from over $70 to $64 in four weeks. This is perhaps the reason for the fall in petrol prices in the United States. Yet in Russia petrol prices have begun to grow fast. They gained over 9% from January until August, and continued the trend in September, gaining 2% or even 3%, depending on the brand. So the retail petrol price has exceeded the psychological threshold of 20 rubles per liter ($1 equals approximately 27 rubles).
Of course, no one in Europe would be surprised by this price. In neighboring Poland, petrol costs 40 rubles per liter (at the Russian Central Bank's rate), and in Britain 50 rubles. But unlike Russia, these countries do not produce oil. Every Russian knows that in the oil-rich Gulf countries you can buy 10 to 20 liters of petrol for the same money.
Petrol prices seldom go down in Russia. The Moscow Fuel Association maintains that a change in oil prices first influences the wholesale price of fuel, and it takes a month or even two for the global market situation to start influencing the prices at petrol stations. But this is enough time for inflation to raise prices, and as a result the retail petrol price remains unchanged only for a short time... until the next surge in oil prices.
This strange behavior of Russian petrol prices is caused by their unusual structure. At first sight, the petrol price seems to consist of the cost of the commodity, the cost of refining, profit and various taxes. Yet unlike other goods, the domestic market has almost no influence on the final figure.
The cost of oil production accounts for a mere 5.5% in the structure of the petrol price; the cost of refining for just above 17%; refineries' profit for about 7%, and the profit of petrol stations for a little more than 3%. The rest is taxes: the excise tax, the severance tax, the VAT, etc. Remarkably, as the petrol price has grown this year, only two of its components have risen: the severance tax, which is set depending on global oil prices, and the profits of oil refineries. It is the increase in these components that makes petrol more expensive at petrol stations. Other components of the price have been falling since the beginning of the year. Evidently, responsibility for the price hike lies with the government and private owners of oil refineries.
Naturally, the government is always to blame when something goes wrong. But this time its responsibility is less than typical. It could, of course, have changed its tax policies faster, but, to be fair, the severance tax regulates the activities of oil producers. Its rate influences first of all the price of crude delivered to refineries, and it does not change more often than once every two months.
A greater role in the retail price hike belongs to the increasing profits of petrol producers. In the first eight months of 2006, the share of the excise tax in the petrol price fell by almost 5%, the cost of oil production and refining by 0.5%, and the profit of petrol stations was down by over 5%. At the same time, the profits of refineries were up over 4%.
Petrol producers have a ready explanation: they say that prices have gone up because of a shortage of fuel. The number of cars in Russia soars by 1 million annually, while no new refineries are being built. In addition, a few refineries were shut down for planned maintenance work. These factors are cited every year to explain the consistently climbing prices.
This time, however, the traditional explanations have become more specific. Vagit Alekperov, president of Russia's largest oil company, LUKoil, proposed to abolish the VAT on imported equipment for the petrochemical industry.
The Economic Development Ministry views the problem a little differently. Deputy Minister Andrei Sharonov said that the tax rate was not the critical factor in the price hike, nor was the growth of global petrochemical prices. Nevertheless, the government is ready to look for a compromise with oil producers. Amendments to the Tax Code will be drafted by yearend. The main reason for growing prices, Sharonov said, is lack of competition in the sector.
Still, it is too early to speak of the conflicting interests of the state and private entrepreneurs. Economic Development Minister German Gref said he did not think that petrochemical prices would exceed the projected annual inflation rate, i.e. 9%. This means that petrol prices are supposed to move down before the end of the year, although it is unclear how this will happen.
Tax amendments promised by the government will not be indorsed by parliament until next spring, so they will not come into force until next summer. Even then, they will concern only to oil companies, while the retail petrochemicals market will react only in winter 2008 at the earliest. That means that Russian car owners can only pin their hopes on oil producers' good will. There is a better solution, though - to create an oil exchange that would regulate domestic oil prices. The government will discuss setting one up in the near future.
