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How Much should Fuel Cost in Reality?

Oil Prices Plunge Worldwide, Georgian Oil Product Importers Gain Colossal Profits.

Oil prices are plunging worldwide. Global exchanges have been recording from plummeting oil prices over the past 3 months. In the aforementioned period, prices have declined by 35% on average. In September, the price of one barrel of WTI oil was 76 USD. Today, the price of a barrel of the same oil is 50 USD. There are a lot of factors lowering global oil prices, and these factors shape a whole chain of events. However, we should outline the key factors that have left a crucial influence on the formation of oil prices.

First of all, we should mention Iran. The new sanctions announced against Iran have brought a short-term upturn in oil prices, because Iran is one of the world’s major oil exporters. The announcement of new sanctions generated expectations that, without Iran’s exports, the market would face an oil deficit, and demand would grow. However, in a parallel regime, the USA (which is a major oil extracting country; in October, the USA’s daily extraction was 11.4 million barrels) increased oil extraction and opened reserves to replenish the expected market deficit. The so-called psychological factors had a decisive effect on oil prices, and the statement released by US President Donald Trump has essentially influenced global tariffs. According to the Trump’s statement on Twitter, oil prices are too high. “I will do my best to lower them,” he said. In the same period, Russia made use of the expected neutralization of Iran’s factor also increased oil extraction volumes. This process, instead of the expected deficit, supplied excessive oil volumes to the market. As a result, prices declined dramatically. The position of European countries also helps to maintain low oil prices, because they cannot reject Iranian oil.

The most interesting thing for us is what happens on the Georgian fuel market amid  global tendencies. Fuel prices started rising after the first quarter, and since then fuel prices have grown 9 times. It is interesting how growing fuel prices have affected domestic or global economic trends. Oil prices are genuinely declining worldwide over the past 4 months, but this tendency was not reflected in the Georgian market in practice, not to mention that the fuel price’s contraction constituted only 3-5 Tetri over the past weeks. But, let’s start from the top, and follow the chronology of developments in the fuel market.

In Georgia, fuel prices started rising in May under the pretext that crude oil prices had risen on the global market. That period genuinely recorded an unimportant upturn in global oil prices. Namely, the price of crude WTI oil rose by 3 USD. This fact was immediately used by companies to raise prices in the retail network by 3-5 Tetri. However, more numerous and larger mismatches are recorded between the domestic market and retail sector.

Deeper analysis shows that in February, the price of a barrel ranged from 59 USD to 61 USD. In the aforementioned period, the price of a liter of Premium was 2.29 GEL, a higher price than in May, when the price of barrel was 70 USD. In the May-June period, the prices of oil and Platts continued rising. As a result, fuel prices increased several times. However, the period from the middle of May to the middle of June recorded an extreme downward trend, and the price of a barrel fell to 64 USD. This change has not left a positive effect on the domestic market. Moreover, amid the declining trends on the global market, fuel prices rose by 3-5 Tetri on the Georgian market. It is also important that in the aforementioned 3-month period, the national currency exchange rate was stable, and the price of USD ranged from 2.44 GEL to 2.45 GEL. As for the situation in August, in the first half fuel prices rose twice, but this process had no economic preconditions.From the end of July to the middle of August, the price of crude oil had declined by 4 USD, and in that period the price of WTI oil was 66 USD. In that period, prices were decreasing on the global exchanges for two weeks, and this tendency was reflected on the Platts price too. However, prices rose on the domestic market on the pretext of GEL exchange rate depreciation.

The truth is that in the same period, in the course of a week, the national currency lost 15 points; however, the currency exchange rate volatility could not immediately influence fuel prices, not to mention the two-week period when the oil prices significantly decreased, and the slowdown process lasted up to the beginning of September.

Starting in the second half of September, the exchanges recorded rising oil prices. This process lasted till the beginning of October. This period recorded the highest oil price, and it exceeded 76 USD for WTI oil. In this period, prices on the domestic market rose twice amid changes in the GEL/USD exchange rates. In the same period, the national currency depreciated by 3 points in relation to USD. The aforementioned factors caused an extreme devaluation of oil prices on exchanges in October. Since October, the price of a barrel of oil has decreased by 35%. At the same time, over the past month the national currency strengthened by about 7 points against the USD. Companies use the aforementioned factors to revise their pricing policy and lower prices. However, five branded companies lowered prices by only 3-5 Tetri. We will more clearly observe unhealthy market tendencies if we compare pricing policy between branded and non branded companies. The difference makes up only 0.51 GEL, and this is a colossal difference for a liter. But for more accuracy, if we calculate the fuel price, which includes the price of one tone of fuel, increased excise tax, VAT and GEL/USD exchange rate (that is all expenditures, excluding operational and transportation costs), the prime cost of one liter of petrol does not exceed 1.61 GEL.

Naturally, this is only the prime cost, and companies add the mentioned expenditures and the profits margin to the prime cost.It is difficult to substantiate the 0.95 GEL difference per litter. Naturally, companies, as commercial organizations, are oriented on profits, while prices should be regulated by competition, which does not exist in the Georgian reality in practice.

There is no efficient controlling body in the country, which would interfere in unhealthy market competition, and prevent violation of the competition law, which has been taking place on our market for many years.

Paata Bairakhtari
Vice President for Association of Young Financiers and Businessmen (AYFB)