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Oil Ping Pong Games

Oil Ping Pong Games

InfoMarket Agency’s comment

Against the background of rising prices for oil products over the past three months, last week, the market and all its participants were again subjected to political criticism. A number of MPs again announced a "conspiracy", not so much a cartel one as a market regulator’s and operators’ "conspiracy", considering that the situation can only be corrected by snap parliamentary elections and a change in the leadership of the National Agency for Energy Regulation (ANRE). This topic is not new for Moldova. But politicians, as it has happened before, often harm the economy without thinking about the consequences on the way to achieving their goals. However, if we ponder a little bit, we can figure out that the oil product market (its operators), like any other segment of the economy and business, needs stability and certainty, at least in the short term. 

Journalists sometimes cannot write what they know about, because they cannot always indicate their sources. It so happened that in a private conversation with the editor of the InfoMarket Agency we heard the story of a regular conclusion of a regular agreement on the supply of natural gas to Moldova. Negotiations (many years ago) were held not only with Moldova, but also with representatives of several other Eastern European countries. And these negotiations used to begin something like this: “Good evening, gentlemen. Let's start with the fact that we have gas, but you don't. So, let's start negotiations...”

Even if this story, passing from mouth to mouth, is a little inaccurate, we must admit that in its logic it is quite real. The situation is approximately the same with oil products in Moldova: we import 100% of them. The issue of oil products pricing is regarded in such a way as to prevent a shortage of oil products on the market, as it happened in the mid-1990s.

Of course, the license provides a penalty for operators in the event of at least some kind of shortage, but this whip may not help if operators simply cannot buy and import fuel for Moldova.

Moving from introduction to facts, we’d like to note that ANRE was ready to fend off any political statements and very quickly published a detailed analysis of the oil products market. The main conclusion is that the pricing methodology needs to be changed. Again. The fifth time in five years.

There are two main methods of price regulation: limiting the maximum retail price and limiting the maximum profitability of operators. And as soon as politicians demand changes, ANRE proposes to change one for another. It looks like a ping pong game.

In 2002-2015, the regulator used to limit the profitability (from the price at which the fuel was sold de facto, taking into account the discounts that simply rule the ball in the competitive struggle in our country). In 2016-2019 (after regular political statements), the methodology was changed and ANRE started limiting oil products prices, every two weeks. In 2018, the situation was brought to the point of absurdity by politicians: having granted independence to ANRE (the Agency is subordinate to parliament), the state (represented by the government) through courts challenged the ANRE decision to raise prices. There were three protests in total. As a result, the courts accepted the decision to freeze prices until the adoption of a new methodology. The absurdity of the situation was that for almost a year, from mid-2018 to spring 2019, prices did not change, despite the fact that oil products are an exchange commodity, and Moldova is not a participant in international trading and cannot influence prices in any way.

From March 2019 to the present, ANRE has again returned to the methodology of limiting profitability - 10% of the price on the filling station’s panel. That is, the operators used to make discounts at the expense of their own profits.

Discounts are generally a separate topic. Due to its mentality, the Moldovan market is very fond of this word. Absolutely all state-owned enterprises and large consumers receive discounts on fuel from operators: the one that gives the greatest discount wins the tenders. It is known for sure that last year parliamentary cars were refueled by 13% cheaper than ordinary people’s cars at filling stations; this year the parliamentary discount is slightly lower, but exceeds 10%. At the same time, operators are also forced to provide a deferred payment (such are the conditions for public procurement auctions), that is, they provide loans to state-owned enterprises.

But let’s get back to pricing. As a summary to a very detailed analysis of the situation on the oil product market, ANRE clarifies that, firstly, in all EU countries there is no mechanism for government agencies to interfere in the price formation process since this process is regulated by the laws of the market economy. Secondly, there is a tendency towards an increase in world prices for oil products, which will definitely continue to be reflected in retail prices in Moldova. ANRE also considers it a paradox that the current methodology of limiting profitability has made it possible to adapt to shocks such as the pandemic. At the same time, ANRE says that in this particular situation it is necessary to change the methodology and return to limiting prices in accordance with the PLATTS quotes, considering it a transparent pricing instrument. Unlike the previous similar practice, when prices were set every two weeks, now ANRE proposes to do it once a month. Is it again "ping-pong" for the sake of politicians? It should be reminded that the previous practice of limiting prices ended with the government's appeal to courts against ANRE decisions. In other words, there is a precedent and there is a chance that if the government again does not like the way ANRE sets maximum retail prices, the regulator’s decision could again be challenged. Not to mention the fact that operators are not happy with this offer: a month is a very long time for the world market, where prices change hourly.

What about the local market? We started with the fact that any business needs stability. Everyone who pays excise taxes is very grateful to the previous Cabinet of ministers, especially the Ministry of Finance, which for the first time in almost 30 years of Moldova’s independence developed a three-year tax policy program (and the parliament adopted it). This means that it is clear to everyone who pays excise taxes how these taxes will increase over the following three years. This means that you can plan your business three years in advance without fear that the rules of the game will change dramatically on the New Year's Eve. Oil products are also subject to excise taxes, and since the tax policy provides for their growth in 2021, 2022 and 2023, this is reflected in the final cost of fuel at filling stations. The share of excise tax in the cost of fuel is 17% (diesel) and 30% (gasoline).

On the one hand, politicians argue that high prices for oil products slow down the development of the economy, on the other hand, they constantly increase excise taxes on them. In addition, the excise tax is paid when importing oil products and later it is included in the price at which VAT is paid at a rate of 20%. That is, the consumer also pays VAT on excise tax.

There are other ways of indirectly regulating prices. In Moldova, 13 licenses were issued for the sale of liquefied gas and 22 - for gasoline and diesel fuel. There are 713 filling stations in the country, and this is a huge number, given the territory. Each filling station is the operator's fixed costs, which ultimately fall on the buyer. And the number of filling stations continues to grow. Over the past 5 years, they have increased by a hundred. The six largest operators account for 67% of all stations (LUKOIL Moldova - 17%, Petrom Moldova - 13%, Rompetrol Moldova - 11%, Tirex-Petrol - 11%, Datario (Vento) - 10%, Bemol - 5%. 33% are shared by small operators.

Any business is designed to make money. The oil product market in our country is regulated not only by licenses, but also by pricing. And the operators play according to these rules, ensuring, among other things, Moldova’s energy security. They, like any business, need clear game rules, at least in the medium term. Ultimately, the consumer pays for everything. // 22.02.2021 - InfoMarket.

P.S .: ANRE analysis of the oil products market in Romanian is available at the following link: http://anre.md/public/assets/admin/vendor/ckeditor/plugins/fileman/Uploads/ANALIZA_PP_final_1_.pdf

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