Sober about the fuel market in Bulgaria – prices, excise taxes and Lukoil

In recent weeks, the public situation in Bulgaria has been particularly heated by a number of protests. However, the greatest escalation of public tension in recent days is rooted not in protests by pensioners, mothers of disabled children, or religious denominations, but in protests against the rise in fuel prices, which was felt particularly sharply in October. And although the prices themselves have already started to fall, the protests continue to this day.

The topic of fuels, their price dynamics and the problems in the retail market in our country has become a favorite of the media in recent days, and in the memory of the GERB ruling party, the memory of the 2013 protests that brought down their first cabinet is certainly taking on an increasingly dense form. And because many incredible things have been happening recently, today we will talk in depth about fuels in Bulgaria – how have prices moved over the past year, why are they moving like this, what is happening on the global market and what can the state do to improve the situation in the retail market?

What is happening to oil prices on the international market?

There is no disturbing or strange trend in the dynamics of retail fuel prices in Bulgaria. In fact, it follows the dynamics of oil prices on the international market relatively closely. For the territory of Europe, the relevant comparison is with the price of "Brent" oil - one of the main brands of crude oil, which is traded in a sphere that practically represents the European equivalent of the American West Texas Intermediate. Here is what the price dynamics of Brent oil on the global spot market look like from the beginning of the year to today:

Източник: Macrotrends

The graph clearly shows two periods of significant price increases this year. The first rise began in early April and peaked in mid-May, after which it stabilized for about a month and a half (from early June to mid-July) at a level of around $74-$76 (US dollars) per barrel. Then there was a drop to around $70 in mid-August, which immediately turned into a sharp jump to $86 by early October. After reaching this peak, the price began to fall. The decline began on October 10 and continued until November 2, after reaching a (temporary?) bottom of approximately $71. Now, let's look at how retail fuel prices in Bulgaria moved during the same period.

What is happening with retail prices in our country?

Източник: Fuelo

The second graph shows the price dynamics of A95 grade gasoline over the past year (13.11.2017 – 13.11.2018). The average value of the prices offered by different companies on the retail market in Bulgaria during the respective period is shown. What is striking? The two periods of significant price increases. First, from the end of April (26.04) to the beginning of June (11.06), the retail price increases from 2.09 BGN per liter to 2.26 BGN per liter. Then there is a long period of about 3 months until mid-September, during which the price remains almost unchanged (except for a slight increase in mid-August). However, from 18.09 to 22.10, the price goes skyrocketing, rising by over 10 cents from 2.27 BGN per liter to 2.38. After reaching this peak in early October, it began to fall and is now 2.23 leva per liter.

Източник: Fuelo

The price trend for diesel over the same period is similar. There is nothing different to comment on here – a price increase from 2.10 to 2.28 leva per liter is reported from the end of April to the beginning of June, just like what happens with gasoline. After that, there are about 3 months of almost no change in price, followed by a serious increase from 2.30 leva per liter to 2.42 leva, which starts on 26.09 and ends on 24.10.

Comparing the graphs of the average retail prices of gasoline and diesel in Bulgaria with the price of Brent crude oil on the global spot market, it becomes abundantly clear that they move in relative synchrony. With a slight delay of about 2-3 weeks, when the price of Brent crude oil starts to rise, the prices of gasoline and diesel on the retail market follow this trend. From 06.04 to 22.05, the price of Brent crude oil rises from $66.5 to $80.4 per barrel. The first significant increase in the price of gasoline is from 26.04 to 11.06 - exactly two or three weeks later. The same is true in the fall, although then the delay is more like about 3-4 weeks.

And yet - is there a problem with fuel prices?

In any case, the trend is clear - retail prices in our country are rising after a corresponding increase in Brent oil prices on the global market, and vice versa. In view of the above data, the accusations that fuel prices in our country are increasing in some way "unlawfully" or "non-market" seem generally unfounded. And accordingly, the protests against the recent price dynamics are rather unjustified. But here someone may object that, abstracting from the price movement itself, their level in Bulgaria is in principle excessive and artificially inflated. This is a different argument that cannot concern the most recent price trends. But this is really an important issue that also needs to be addressed.

In general, the data show that fuel prices in our country are low. A check by bTV clearly showed this – only in Romania and Hungary do they have lower prices for A95 gasoline. However, an important note here is that this is due to the relatively low levels of excise duty in our country. The net price of A95 is 63 euro cents per liter in our country, which is more expensive than in 24 of the EU member states. The situation with diesel is better – in our country it is cheaper than in 11 EU member states.

In response to these data, comments appeared in some media outlets that this is evidence that there is a problem in the fuel market in the country. Specifically, there is a problem with the almost monopoly position of Lukoil - the lack of competition in the market leads to higher prices. This is undoubtedly the case. Unfortunately, the methods for dealing with this problem that are offered are usually completely inadequate and counterproductive. An article appeared in Club Z that accused the state of supporting Lukoil's profits by keeping the excise tax at the lowest possible level. And accordingly, the article proposes that the excise tax be raised.

How to fight the almost monopoly position of "Lukoil"?

This is an extremely strange idea, given that such an increase in excise duty would certainly lead to an increase in fuel prices and would only exacerbate public discontent related to the topic. And this in itself would harm Lukoil's competitors much more than the Russian oil giant itself. Due to its dominant position in the market, Lukoil's financial situation is most likely much more stable than that of most competitors. Accordingly, the Russian giant is in a better position to bear the additional tax burden. Raising the excise duty would rather exacerbate the advantage that Lukoil has over its competitors even more and would further solidify their almost monopoly position over the market. Therefore, raising the excise duty is not a solution at all.

In fact, in principle, the easiest way to lower fuel prices is to remove the excise tax. This would solve absolutely all problems with the fuel market in Bulgaria. First of all, it would obviously lead to a drop in price, given the fact that the excise taxes that companies in the sector pay represent a huge part of all their costs and, accordingly, lead to a more limited supply of fuels and a higher price. Second, the removal of the excise tax would hit the almost monopoly market position that Lukoil has managed to establish through their control of over 80% of the excise warehouses in the sector. It is obvious that if there is no excise tax - there are no excise warehouses - there is no monopoly for Lukoil.

The problem is that the existence of such an excise tax is not only a national, but also a European issue. The minimum levels of the allowable excise tax on fuels are set at the EU level, respectively, we cannot decide to simply remove them unilaterally. The fact that our state keeps excise taxes at their minimum levels allowable within the EU is actually not a bad thing, on the contrary. That is exactly what it should do.

Excise warehouses - who needs them besides Lukoil?

As I mentioned above, the big problem with Lukoil's dominant position in the market in our country is largely due to the fact that the company controls over 80% of the excise warehouses in the country. These are special warehouses that allow the storage of the relevant goods (fuel in this case) in a deferred excise duty regime. That is, as long as you keep the goods in the excise warehouse, you do not need to pay excise duty on them. The idea of these warehouses is generally good, but the problem is that if one of the players in the sector somehow manages to establish control over all or almost all such warehouses, it can use this position to artificially increase the costs of its competitors and, accordingly, secure a better position in the market.

This is exactly what is happening in our country with "Lukoil", which according to the latest data holds 90% of the gasoline warehouses and 82% of those for diesel. The solution is to eliminate excise warehouses. The very idea of excise warehouses is not bad, because they allow the burden of the excise tax to be postponed in time until the moment when the relevant goods are brought to the market. This is a good pro-market measure that can be maintained even without excise warehouses. Simply create a tax regime that allows all companies that sell fuels in the country to postpone excise taxation until the moment when the relevant goods are brought to the market and become available to consumers. Thus, in practice, each such company will have its own "excise warehouse" according to the definition of the law.

This is the easiest and most effective way to break the current near-monopoly position that Lukoil has in the domestic fuel market. Any other methods would be ineffective, and especially measures such as raising the excise tax would most likely achieve exactly the opposite effect.

Did you like it? Take a minute to support the EKIP on Patreon!