Latvia might put up to 40,000 tons of oil reserves on market - Valainis

RIGA - Latvia might put up to 40,000 tons of oil reserves on the market, Economics Minister Viktors Valainis (Greens/Farmers) told the media on Thursday.

The minister explained that after the International Energy Agency (IEA) announced that oil reserves would be released to the market, a procedure had been launched in Latvia to identify the amount of fuel available on the market. Currently, a questionnaire has been sent to market participants on the physical reserves stored in Latvia, the volumes available to traders and the situation on the fuel market, including the pricing policy. Once the information is available, a decision will be taken on the future use of Latvian reserves.

He noted that the availability of physical fuel reserves in Latvia is currently stable and there are no significant supply risks at present. At the same time, the development of global markets is difficult to predict, therefore it is necessary to maintain a cautious approach and assess different possible scenarios.

Valainis stressed that when deciding on the transfer of reserves to the market, it is important to have the greatest possible impact on the market situation and fuel prices, while maintaining the main purpose of the reserves - to ensure the availability of resources in case of a real fuel shortage in Latvia.

The minister pointed out that IEA Member States jointly take decisions on the release of reserves in response to possible fuel shortages on the world market. Each country decides on the release of reserves according to its own level of reserves, thus signaling that despite the 20 percent shortfall in the fuel market caused by the war, this shortfall will be essentially replaced.

Valainis added that it would also be useful for the Baltic states to coordinate with Poland, one of the largest fuel wholesalers in Latvia, on this issue. "Such an approach could have a more positive impact on the regional market," he said.

"If these reserves are released on the market, it will be a short-term result. It cannot have a long-term effect. We are talking about 40,000 tons from Latvia - that is 10 to 14 days," the minister said. He pointed out that in this case it is Latvia's participation in a joint attempt to stabilize the world market.

At the same time, Valainis stressed that Latvia should approach the use of reserves with caution. According to him, the situation on the oil market has been very volatile in recent weeks, so it would be important for the country to keep as much physical reserves as possible.

At the same time, the minister also expressed his personal opinion that the reserves that have been purchased and are in the possession of the state in Latvia should not be put on the market, as the development of the situation in the near future is still difficult to predict, therefore, in the interest of the state and the economy, the reserves that are at the disposal of the state should not be touched.

As regards the possible impact on consumers, the minister pointed out that this was difficult to predict at present. If the reserves were sold at market price, the impact on the fuel price would be insignificant, while the impact would be higher if the state applied additional support mechanisms. According to Valainis, one of the most effective solutions would be to reduce the excise duty on fuel.

Valainis mentioned that, as regards the situation in Latvia, taking into account the divergent views between the Ministry of Economics and fuel traders, in order to ensure that unjustified profits are not made in the face of price fluctuations, the introduction of a fixed-term excess profit tax is to be encouraged. This would allow the market situation to be monitored and, in the event that market players' profits were to significantly exceed their normal level, the excess profits would be redirected to the public good through fiscal instruments in the form of taxes.

If market participants compete in good faith and do not profit from the situation, there will be no excess profits. Otherwise, it will be clearly visible in companies' financial statements, the minister stressed.

On the issue of reducing excise duty on fuel, the minister said that the government would take a decision on this in the light of the evolution of fuel prices and the impact of the war. If the impact is short-term, there will be no need to reduce excise duty, but if forecasts show that hostilities will be prolonged, portable solutions will follow.

At the same time, asked whether fuel traders were able to explain "every cent added" to fuel prices, Valainis noted that he was not convinced.

Valainis also stressed that the issue of the fuel market is on the agenda of all responsible authorities.

Gatis Titovs, head of the fuel category at fuel retailer Circle K Latvia, told reporters that the focus should be less on crude oil quotations on stock exchanges and more on fuel quotations on the stock exchange.

He explained that over the last month the price of Brent crude oil has risen from around USD 68 to USD 98 per barrel. Diesel quotations on the bourse, on the other hand, have risen from around USD 700 at the beginning of February to USD 1 200. Converted into euro and liters, this would represent an increase of around 46 cents for the final consumer.

Titovs pointed out that, looking at retailer prices, the increase so far had been around 36 cents per liter, which, he said, was in line with the market situation. He added that fuel traders also use savings and partly cover cost increases from profits, so there is no reason to talk about excess profits at the moment.

He also stressed that there were no problems with fuel supplies at the moment. The situation has been discussed both with suppliers and within the industry association and the major suppliers in Latvia have confirmed that there are no problems with oil supplies, product processing and logistics. Therefore, fuel shortages are not expected in the near future and the main issue is price.

Titovs pointed out that the industry had explained fuel pricing during the meeting, but that the Minister of Economy had not been fully convinced. The price dynamics may have raised questions, as there was a drop in oil prices on March 9, which was not immediately reflected in fuel prices for consumers.

He explained that on that day, the quotation of fuel on the stock exchange did not actually decrease - it increased by one cent. It was only the next day that prices fell, and then rose again. Titovs stressed that one-day price fluctuations are usually not reflected in retail prices, as traders mostly work with long-term contracts where the price is fixed for an average period - a month, a week or three days.

Ieva Smite, Chairperson of the Competition Council, commented that the authority draws conclusions only after specific investigations have been carried out and full information has been obtained. In this case, Thursday's meeting was informative.

Smite notes that the situation is an important issue for everyone, and the Competition Council is no exception. Smite refrained from commenting further.

As reported, the average price of diesel fuel in Latvia's largest petrol station networks has increased by around 25 percent since the escalation of the conflict in the Middle East on February 28 this year, while the price of 95-brand petrol has risen by 7-9 percent.