Experts surveyed by "RG" are confident that wholesale fuel prices will increase, although not as dramatically as the rise in oil prices. The increase in retail prices is expected to align closely with inflation rates. Consequently, the profitability of oil refining and fuel retailing will diminish.
The essential point is that the rise in oil prices does not mean that Russian oil companies sell crude to domestic refineries at $77 per barrel. The price mentioned in the Ministry of Economic Development’s report is used to calculate taxes for oil companies, which are levied on all oil produced in the country from the previous month.
The payments for March will be processed in April. This clarification is crucial. With Urals priced at $77, the tax payments that companies must make from each barrel amount to around 65-68%. This means that the mandatory tax portion of the Urals price in April will be about $50, exceeding the total cost of Urals from the previous month. Thus, we can expect that the primary increase in domestic oil prices will occur this month.
According to Reuters, citing trader data, the price for a ton of oil from Western Siberia, supplied to the Russian domestic market, increased on average by 32,600 rubles in April compared to March, reaching levels of 59,000-60,000 rubles per ton.
So far, there hasn't been a significant market reaction to this price hike. The prices for AI-92 and AI-95 gasoline are near the year's highs, but still below the peaks of last autumn. However, it is essential to note that since April has just begun, the increase in domestic oil prices may not have yet affected trading.
In Russia, the proportion of oil in the price of a liter of gasoline ranges from 15% to 35%. The higher the oil price, the greater its share. Additionally, the increase in export prices for oil and oil products does not directly transfer to the prices of gasoline or diesel in wholesale and retail markets. This is due to the structure of the domestic tax system.
Russia employs a mechanism for reverse excise taxes for oil supplies intended for domestic processing, which partially offsets the tax payments of the refineries. This reverse excise scheme includes a damping mechanism, providing partial budget compensation to oil producers for supplying fuel to the domestic market at lower prices than export prices. The size of the compensation from the damping mechanism is directly proportional to the difference between export alternatives (European prices) and the indicative price determined by the government for the domestic market. The damping can also be negative, meaning when export prices drop below indicative prices, oil producers must pay the difference to the budget. This situation occurred in January and February (with payments in February and March), leading to losses for oil producers amounting to 33.8 billion rubles over those two months. However, for March (in April), they could already receive approximately 150-200 billion rubles from the budget, depending on various estimates. It remains to be seen whether these payouts might cover past expenditures and the decline in refining profitability.
As noted by Yuri Stankevich, Deputy Chairman of the State Duma Energy Committee, in scenarios where the incoming oil to refineries sees a significant price increase, the margins for these plants decrease substantially without compensatory mechanisms. To recover margins, plants tend to raise wholesale prices for gasoline and diesel. Therefore, short-term pressure on wholesale and small wholesale prices is inevitable. Retail prices tend to adjust more slowly, given the damping mechanism's influence and an unofficial directive to curb socially sensitive pricing. Meanwhile, the high tax share in the price per liter (60-70%) makes the final price less volatile compared to raw material prices.
According to Sergey Tereshkin, General Director of Open Oil Market, three-quarters of Russian oil refining is handled by vertically integrated oil companies (VIOCs), which control the entire production and supply chain from well to gas station. It is unlikely that the companies engaged in oil extraction base their sales to refinery subsidiaries on global prices, even factoring in tax supervision over transfer pricing.
Higher procurement costs for raw materials generally characterize independent refineries; however, such facilities account for only a quarter of primary oil processing and an even smaller share of gasoline and diesel production. Therefore, despite the surge in international prices, the situation for Russian oil refining should not be overly dramatized, according to experts.
Dmitry Gusev, Deputy Chairman of the Supervisory Board of the "Reliable Partner" Association and a member of the expert council for the "Gas Stations of Russia" competition, believes that retail prices will continue to align with inflation, while wholesale prices will definitely rise. Despite export bans and geopolitical conditions, we remain part of the global oil and oil products market, which continues to affect our domestic market. This interaction is what moderates the damping effects.
Stankevich clarified that the damping mechanism only smooths out but does not negate external pressures on the market. Under sustained increases in oil prices, it is challenging to entirely contain wholesale price growth. Moreover, the damping mechanism does not always fully offset increases in raw material costs, as its formula includes coefficients that can lead to "undercounting" during peak moments.
Indeed, previous estimates indicated that the damping mechanism struggles to adequately compensate oil producers' costs when the price of Russian oil exceeds $90 per barrel. However, Urals prices have not yet reached this level. The question remains whether it is possible to detach internal prices from external influences. Europe is an importer of oil and oil products, and domestic prices are effectively tied to those of Europe.
From the standpoint of Sergey Frolov, managing partner of NEFT Research, it is impossible to achieve this under the current tax system. The tax maneuver—elimination of export duties on oil and oil products coupled with an increase in mineral extraction tax (MET) —was a mistake, which facilitated tax deductions from the industry but simultaneously brought Russian oil processing to the brink of profitability. Its viability in recent years has primarily depended on the damping mechanism that was initially a temporary measure functioning effectively within a limited range of external and internal conditions (thus requiring continuous adjustments).
Stankevich believes that under a zero export duty and the existing MET formula, complete disconnection of internal prices from global prices is practically impossible without reverting to a stricter system of state regulation or segmenting the oil market.
Currently, extractive companies are indifferent to whether they sell oil for export or on the domestic market—they are guided by world prices minus logistics and duties. To "decouple" domestic prices, it is necessary either to introduce a regulated (administrative) price for refineries or radically alter the MET, disassociating it from world prices or introduce differential taxation for oil supplied to the domestic market. All three options entail a loss of budgetary income or its redistribution, a distortion of incentives for extraction, and an increased risk of shortages or cross-subsidization.
Vyacheslav Mishchenko, head of the Center for Analysis of Strategies and Technologies in the Energy Sector, argues that we must focus on creating our own market and price-setting mechanisms independent of international oil price benchmarks. As we establish these mechanisms, we must keep in mind that the domestic market is a priority amid the current situation. Certainly, we need to develop oil export supplies, but only after meeting the demands of our domestic economy. This regularly raises the question of the equivalence of export and domestic market supplies. Traditionally, the industry operated on the "export alternative" principle, where supplies to domestic refineries should not be less lucrative for oil companies than exports.
According to the expert, it is not entirely correct to rely on administrative measures and government price regulation to create our own market. Conditions should be established to develop our own pricing mechanisms—the export quote of Russian oil and the internal market price. In this pair, the new tax system should ensure that exports and domestic market supplies yield equal profitability for refineries. However, this new system must be set up correctly, step by step, avoiding excessive administrative regulatory principles while listening to and understanding the market. Only then will it be safeguarded against shocks, such as the current energy crisis worldwide.
Source: RG.RU
