Gas prices spark price-fixing debate

  • 2005-04-27
  • By Julia Balandina
RIGA - The unprecedented rise in retail fuel prices in recent weeks has many Balts walking away from the pumps with a scowl on their faces. The increase has been, in fact, so dramatic that some leading figures, including the prime minister himself, have openly expressed suspicions that retailers are fixing prices.

Transport Minister Ainars Slesers suggested that retailers were speculating on the market and that the government needed to step in with regulations.

The jawboning has largely had minimal influence, though the April 23 's 24 weekend saw two leading retailers 's Latvija Statoil and Neste Latvija waging an impromptu price battle that resulted in a 0.049 lat decrease in gasoline prices for over a day. By Monday (April 25) morning, however, prices had returned to their Friday level.

Neste Latvija retail manager Zigismunds Niedra was quoted by the Baltic News Service as saying that "Friday brought to the fuel retail market changes that required immediate response to keep prices competitive."

Latvija Statoil CEO Baiba Rubesa said that the company had offered holders of Statoil Extra card a 0.014 lat discount per liter instead of the previous 0.007 lat discount, a marketing ploy that the company has used before. "This time Neste overreacted and rapidly lowered the price in order not to lose clients over the weekend," said Rubesa.

For Slesers, the price-zigzag seemed to signal the final straw. "The fact that over the weekend fuel prices in Latvia fell by 5 santims and today are back on their formal level demonstrates the chaos and free-for-all that reign on the fuel market," he said. "The government should intervene."

He told the press on April 26 that the Cabinet has assigned the Economy Ministry with the task of preparing proposals for solving the problem. The ministry has two weeks.

"The state should not look on passively while they are making fools of all the motorists," Slesers said in further commentary on the weekend price-cutting campaign.

One solution, he said, could be opening up the supply market to competition. Currently Latvia gets most its gasoline from Mazeikiu Nafta, the refining complex in Lithuania.

The Cabinet, however, stopped short of recommending price regulations. Aigars Stokenbergs, economics adviser to the prime minister, said the government would support any constructive measures proposed by the Transport Ministry but that interfering in price formulation would have to be considered carefully.

Ojars Karcevskis, chairman of Latvia's Fuel Retailers Association, told the Baltic News Service that any such interference was legally impossible. "They can not set neither the maximum, nor minimum price. I can not imagine how, being in the EU, the Latvian government might regulate this market," he said.

Overall, local and international experts say oil prices will move in only one direction in the short- to mid-term: up. Latvia Statoil, the largest fuel retailer, held a press conference last week explaining the dynamics of retail gasoline prices. In their estimation, the worst is yet to come. Prices at the pump are set to rise during the next couple years, though exactly how high they were reluctant to say.

"Fuel prices in Latvia could remain at 50 's 60 santims per liter for now, although the current situation is very difficult to forecast," said Rubesa. "The times when it was possible to do that are over," she added.

Haim Kogan, chairman of Lukoil Baltija R, the Latvian subsidiary of the Russian oil giant Lukoil that operates a chain of filling stations, stated that it is impossible to forecast fuel prices anymore. "All I can say is that we won't be back to the old fuel prices ever again. The prices will be going up," he said. "But I think oil prices will remain at $35 's $45 per barrel."

Statoil blames the government for the current situation, saying taxes should be lowered to compensate for high crude prices on world commodity markets. According to the company, at 0.55, lat about 49 percent of the retail price consists of taxes. A little bit less 's 42 percent 's is the actual oil price, and only 9 percent the company's income.

"The Latvian government could put some efforts to decrease this price," said Rubesa. She said the government could decrease the value-added tax and lobby EU institutions to decrease the level of the excise tax, though the latter, she admitted, would be a tremendous challenge.

To be sure, high gas prices are bringing grief and scandal not just in Latvia. Last week the Ukrainian Cabinet brought pressure on Lukoil and TNK-BP, two Russian crude producers with downstream operations in Ukraine, to desist what it has called price-fixing on the retail fuel market.

"The raising of prices is artificial," Ukrainian Prime Minister Yulia Tymoshenko said at a news conference in Kiev last week, referring to the 13 percent rise in retail gas prices in the country. "They want to put their hands not on our pulse but on our throat."

Latvia's Prime Minister Aigars Kalvitis recently said that it was a mistake to allow Statoil to unite with Shell in 2002. "Since we don't have a lot of fuel retailers on our market, there is quite a good chance for the price fixing between them," he said.

Rubesa found the PM's remarks slightly offensive and said that there is no price-fixing taking place. She said Statoil has been working without a profit. "Estimating the fuel price we are bearing in mind the common tendency, but not the current oil price balance," she explained.

"If right after the increase of fuel price comes the decrease, it cannot be reflected immediately on prices in Latvia, because companies are evaluating this tendency for a long period of time," Rubesa added.

A forecast based on estimates from Goldman Sachs, an investment bank, showed that if the oil price on the world's market reaches $105 per barrel, the fuel price in Latvia will increase up to 0.80 lat per liter. This could happen in 2007.

Statoil's quality and logistic department reported that for the past five months the average oil price has increased 32 percent, while the fuel price has gone up by only 12.5 percent.

Statoil traditionally has the highest fuel prices among all Latvian fuel retailers, claiming that this is due to superior service and quality of its product.