Fuel prices stay high despite pump action

The austerity measures taken to reduce the budgetary deficit along with other macroeconomic changes will have a direct impact on fuel demand, from both companies and individuals, say representatives of local oil firms. Despite the gloomy future for oil retail, state enquiries into suspected oil cartels and Romanians’ boycotts of filling stations, oil company officials say fuel prices aren’t open to negotiation as “A company is not a charitable institution.” Specialists have predicted that oil could soon hit USD 110, in part due to the unrest in Egypt.

Oil prices recently smashed through USD 100 a barrel for the first time since the 2008 economic crisis, as traders worried that unrest in Egypt could disrupt oil flows through the Suez Canal. Prices surged to USD 101 a barrel for London’s main Brent North Sea crude contract, as Egyptian protesters gathered for a seventh straight day amid threats of a general strike. Egypt is not a major oil producer, but is home to the vitally important Suez Canal, which carries around 2.4 million barrels of oil a day – roughly equivalent to the daily output of Iraq or Brazil.

Although hundreds of kilometers away, Romanians are keeping their eyes fixed on the Egypt situation as their small victory over hiking fuel prices may not turn out to be a victory at all. Since the beginning of the year, Romanian transporters, taxi drivers – basically everyone who earns their money by using a car – have declared war on the oil companies on the local market: Petrom, Rompetrol, Lukoil, MOL, Agip and OMV.

While the protesters who used online social media channels to promote the protest were unhappy with the high price of fuel compared with Romanians’ purchasing power, the companies stated, “A company is not a charitable institution and will always seek to maximize profits.”

The protests rapidly caught the authorities’ attention, as protestors said that in the absence of action, they will buy fuel from other European countries. The Romanian state pockets half the value of petrol and diesel oil sales, i.e. around EUR 3.5 billion in 2010, the equivalent of 9 percent of its revenues, based on estimates of the amount of fuels sold on the local market. Around EUR 20 million worth of petrol and diesel oil are sold daily in Romania. According to oil companies, around half the price paid by Romanians at the pump takes the form of excises, VAT or taxes such as the ‘cent per liter’ tax levied in order to pay off the historical debts of the former Compania Romana de Petrol (Romanian Oil Company, ROC). Statements from players in the oil sector are confirmed by European statistics, according to which on January 10, 2011 one liter of petrol cost EUR 1.17 on average in Romania, with the tax-less price, i.e. the amount that goes into the pockets of oil companies, accounting for around 50 percent of the direct or indirect taxes that oil companies pay to the Romanian state. The same is true of diesel, where taxes account for around 46 percent, according to European statistics. The bulk of the cash collected by the state from selling oil products comes through excises, which account for 25-30 percent of the end price, depending on the type of fuel.

Read more about

6 activities to try in Bucharest during the Easter weekend

read more

How fuel prices are

determined

Fuels have got very expensive in the past few years in Romania. For example, Petrom – which is the largest producer and distributor of fuels in Romania, with a retail market share of around 40 percent – has increased the price of premium unleaded gasoline 95 by some 72 percent in two years (RON 2.87 lei per liter in early January 2009 versus currently RON 4.94 per liter), while diesel Euro 5 hiked by 52 percent (from RON 3.17 per liter in January 2009 to RON 4.82 per liter now).

One explanation is that firms charge double or almost triple the actual price of fuel. A levy is introduced in the pump price, called ‘cent per liter’. The sum of USD 0.01 per liter of fuel is included in the sale prices of petrol and diesel to pay off the debt of the former ROC in former Bancorex, covered by the state budget. The bank lent the ROC – which controlled all the refineries in Romania at that time – for imports of crude and fuel oil for the winter of 1996-1997, the total sum (including penalties) of USD 647 million at the exchange rate of that period. When the ROC was divided, each refinery returned a share of this debt. After Bancorex disappearance in November 2000 it was decided to introduce the ‘cent per liter’ tax. Currently, the rate is about RON 3.3 to the dollar. This means that a further RON 0.033 is charged per liter of petrol or diesel. Then there is the duty, which means RON 0.05/liter for gasoline and RON 0.04 per liter on diesel. Finally, the last charge is VAT, which is now 24 percent. Thus, half of the “pump” price is represented by taxes. The rest is the price of oil, its transportation, refining and distribution costs and corporate profits.

Production costs

Production costs in OPEC and the Caspian Sea, according to some analysts, are about USD 2-3 per barrel. As a barrel has 160 liters, and the rate is about RON 3.3/dollar it means that a liter of oil costs approximately RON 0.06 to produce. By comparison, the non-OPEC countries (Russia, Mexico, Norway) have production costs of approximately USD 8-10 per barrel, meaning RON 0.2 per liter. The Organization of Petroleum Exporting Countries (OPEC) pumps about 40 percent of the world’s oil, with the bulk coming from member Saudi Arabia.

 As President Traian Basescu stated, Petrom produces at a cost of USD 12 per barrel, or about RON 0.25/liter. Factoring in the average transportation cost of USD 10 a barrel (about RON 0.2/liter), the real cost of oil is USD 12-13 for OPEC countries and USD 18-20 for non-OPEC countries. According to Competition Council officials, the price of Euro Super 95 gasoline without tax is between EUR 0.65 per liter in Denmark and EUR 0.53 in Ireland, with a European average of EUR 0.59 per liter. The pre-tax price in Romania is EUR 0.59 per liter, and in Bulgaria, EUR 0.57. For diesel, the EU 27 average is EUR 0.64 per liter before extra charges, while in Romania it costs EUR 0.63 per liter without tax.

Petrom, Rompetrol and Lukoil, the biggest domestic players, are oil producers. Petrom produces oil at a cost of about RON 0.25/liter, Lukoil RON 0.2/liter, and KazMunaiGaz (owner of Rompetrol) at RON 0.06 per liter. If we add the other costs (refining, insurance, distribution and transportation), the cost of petrol and diesel should be less than one RON per liter. The pump price is about RON 1.2; VAT, RON 0.083; duty and ‘the cent per liter’ tax RON 0.75; a total of RON 2. The rest, making up the current price, is the company’s profits.

Oil companies’ reaction

Regarding the authorities’ investigation, MOL Romania told Business Review it would continue to cooperate and put all the required information at their disposal. Petrom officials also responded promptly. “We do not comment either on the information or the allegations regarding oil companies. We are a listed company, with a high level of transparency and the result of our activity, our pricing policy as well as other relevant information have been comprehensively communicated. All our financial indicators are calculated based on international and Romanian standards and audited by one of the top auditing companies in the world. We are ready to continue to respond to any requests coming from authorities.” Petrom officials added: “Petrom’s prices have a dynamic evolution based on the international fuel quotations as well as competition on the market. In addition, the prices are influenced by fiscal policy and the exchange rate. The tax component represents around half of the fuel price. Petrom reflects the international quotations for oil products in a moderate manner. Petrom prices remain among the lowest in Romania, and the average prices charged by fuel operators in Romania are among the lowest in the European Union. We do not comment the way in which ANAF interpreted the information provided by the oil companies.”

Small gain for drivers

After days of protests, the biggest players on the Romanian oil market, Petrom and Rompetrol, announced the first price cuts this year, of around RON 0.4 per liter. The move did not come due to protests in filling stations or as a result of politicians’ tough statements, but thanks to the elimination of a tax, namely the ‘cent per liter’.

“Owing to the reduction of the tax component by USD 0.01, after the collection of the tax representing the special fund for oil products (FSPP) was suspended, fuel prices in OMV and Petrom filling stations will fall by RON 0.4 per liter starting 25 January 2011,” said representatives of Petrom. In their turn, representatives of Rompetrol, the second biggest player on the domestic oil market, said the company brought in a price reduction of RON 0.3 starting the same day for all types of fuel sold in its network.

But if drivers are unhappy, oil companies are finding little reason to celebrate either. “Our estimations show that 2011 will continue to be marked by the effects of the recession. The austerity measures taken to reduce the budgetary deficit along with other macroeconomic evolutions will have a direct impact on fuel demand, from both companies and individuals. The decrease will however continue to lessen, and in the second half of 2011 we could see a stabilization of sales, on the condition that Romania’s economic situation improves. This potential stabilization could be stimulated through the implementation of certain measures to help the private sector and reinforce trust in the country’s economy,” MOL Romania representatives told Business Review. Currently the company has 126 filling stations and a market share of 11 percent.

Emma Pinnock, an analyst at UK energy consultancy Inenco, predicted that oil could soon strike USD 110, in part thanks to the unrest in Egypt. “Oil prices are set to move rapidly towards USD 110 a barrel as a weak dollar, greater global demand and tighter supplies create similar conditions to when prices reached a record high of USD 147 in 2008,” she said. “Prices rose by more than 15 percent during 2010 and USD 110 a barrel is looking more likely as we can see similar market conditions to when oil reached a record high in 2008.”

 MOL officials added: “The situation in Egypt has caused the market to worry about the flow of oil in the Middle East – and obviously decisions made by OPEC in the next few months will also have a huge impact on prices.”