The plant is closed for repairs
— According to Energy Minister Nikolai Shulginov, the fuel market in our country is now stable and does not need additional stabilizing measures. But we have not yet forgotten the situation of last autumn, when in some regions there was a shortage of gasoline and diesel fuel and a ban on the export of petroleum products was introduced. If there is a significant reduction in production, will the topic of a possible ban on fuel exports become relevant again?
Yushkov: Yes, this is possible. The export ban is the latest argument in the dispute with the companies. One of the reasons that can lead to this is that the refinery undergoes preventive maintenance. Every year, factories en masse go out for repairs in the summer. Something needs to be done about this. Perhaps in 2024 the government will build this schedule more strictly so that there is no physical shortage of gasoline. The country’s domestic fuel consumption is growing. After the pandemic and the closure of airports in southern Russia, people began to increasingly travel by car. In summer, the demand for gasoline increases. And at the same moment, as soon as the automobile season begins, scheduled repairs at the refinery begin. Plus, agricultural machinery, which is especially actively used during this period, takes up a significant share of fuel resources. In addition, some of the diesel fuel goes to the wastewater treatment plant. Therefore, what is important here is rather the issue of synchronizing the operation of the refinery. But if we have enough diesel, the situation with gasoline is more complicated. Now, if at least 1-2% of production volume falls, fuel will have to be brought in from other regions. It turns out that logistics will become more difficult. But this is rather a problem of the companies themselves. The state has a reinforced concrete position: yes, fuel prices rise every year on the stock exchange, but we must make sure that it does not rise above retail inflation.
— Meanwhile, at the beginning of the year there was an accident at the largest oil refinery in Nizhny Novgorod. What consequences can this situation lead to?
Pikin: If we talk about the specific refinery where the emergency occurred, then, according to Minister Shulginov, this plant will be repaired in about a month. Relatively speaking, by the beginning of March it will start working again – that is, even before the start of the active season for gasoline use. Therefore, I don’t think there will be any difficulties with gasoline.
Yushkov: The Nizhny Novgorod refinery is one of the largest in terms of gasoline production. And here it is necessary to clarify that approximately the same amount of gasoline is produced in Russia as is consumed on the domestic market: approximately 90% of what is produced is consumed immediately. So, the Nizhny Novgorod refinery produced approximately 10% of all Russian gasoline. It turns out that due to the accident we are faced with either a shortage in the domestic market or we stop exporting. As for diesel, about 50% of what Russia produces is exported. And here it is impossible to ban, for example, the export of diesel. Then all factories will have to either be stopped or reconfigured. And this is a rather dangerous story.
— What tools can the authorities use in an attempt to prevent fuel prices from rising and what consequences can this lead to?
Suverov: The most effective tool that authorities can use is the use of a damper. The point is that the state subsidizes the cost of petroleum products to oil companies if their price on export markets is higher than on the domestic market. This mechanism has been used quite effectively in the past. But in 2023, the government abolished the damper, and this was one of the reasons for the rise in prices for petroleum products. Now the previous damper parameters have been returned, so I hope this will stabilize fuel prices. Another tool is the ban on the export of petroleum products, but this measure has a downside. This, in particular, deprives oil workers of foreign exchange income and, from a macroeconomic point of view, negatively affects the ruble exchange rate. Therefore, this is a fairly harsh measure, but with large side effects. Therefore, it is probably better to hold it until better times.
“It’s no secret that our oil refineries are constant targets of attack by Ukrainian drones. Does this factor increase the risk of a gasoline shortage on the Russian market?
Yushkov: Yes, Ukraine is constantly trying to attack our processing plants or fuel storage facilities. And indeed they are at risk. Therefore, there is a prospect of a physical shortage of gasoline production. But there is a way out of this situation. We will be able to buy more gasoline from Belarus. They have two large refineries that are underutilized. But here the prices will be completely different – higher.
Pikin: After the accident at the refinery, the government, remembering the mistakes of last year, announced, just in case, that it could introduce an export ban. But no catastrophe occurred and this measure was not needed. So the authorities will solve the issue with gasoline in the paradigm that has developed in recent years: retail prices are not higher than inflation.
Control mode: manual but market
— In 2023, Western sanctions against our oil industry led to a number of negative consequences. Due to the EU embargo on the import of oil and petroleum products, as well as the price ceiling on them, our oil began to be sold at a huge discount, and the budget received less revenue. In order to increase revenues to the treasury, the idea arose to halve payments to oil workers from the budget for dampers – for supplying fuel to the domestic market at low prices. It was from this moment that fuel prices went up sharply. In your opinion, is it possible to adjust the damper parameters in 2024?
Pikin: The Ministry of Finance would be happy to abolish the damper completely. Therefore, if something goes wrong, for example, some new pandemic sweeps the whole world, then the damper parameters will be reviewed again. Because budget revenues will decline. You can come up with many similar scenarios. But other things being equal, as it seems now, as of the beginning of February, nothing will be touched.
— Due to sanctions and their consequences, the federal budget received less revenue last year. How much has our treasury lost and what is the forecast for revenues in 2024?
Yushkov: The budget for 2023 was initially planned with a three percent deficit. As a result, the deficit was slightly more than 1%. That is, on the whole, they actually worked even better than planned. The non-oil and gas sector has generated quite large revenues for the federal budget. This year we will see what happens on the global oil market. The revenues of the entire Russian budget will largely depend on this.
— But despite all this, there is currently no talk of actually regulating fuel prices in Russia?
Pikin: In my opinion, not yet. Because even at the most critical time for the market, in September last year, the most that had to be done was to introduce an export ban. This is not a regulatory system, but simply a barrier that has been closed, and that’s all. Our authorities are trying to act in a mode of manual, but market regulation. This segment works well, but excessive intervention can ruin the well-functioning mechanism itself. To be honest, there was no sign of government regulation even during the crisis, and even more so now.
— And if the authorities had not taken the levers of control into their own hands last year and introduced an export ban, how would the market have reacted?
Yushkov: It would take longer for the market to come to its senses, and accusations would pour in towards the government that the authorities are not doing anything, that they simply left everyone alone with the disaster. But the authorities intervened and introduced a fairly strict measure in the form of an export ban. It worked relatively quickly. In Russia, on the one hand, there is no desire to switch to strict regulation of the fuel market. But, on the other hand, the state has tools to influence the market. For example, the authorities can change the excise tax, various taxes, the economics of companies, or those very damper payments that we discussed earlier. But the authorities do not want to change anything radically.
Pikin: It must be understood that the industry still operates in the international trading system. It is impossible to create separate sandboxes for the same product within the framework of international trade. All attempts in other countries to do something similar led to the fact that the industry degraded. A striking example is Venezuela. Yes, fuel there was cheaper than water. And look what this led to? Oil production there has now fallen sharply. There is only water left.
Axiom of price
— Why do gasoline prices vary so much in different regions of Russia?
Pikin: Firstly, it’s a matter of logistics. There are key geographic nodes where fuel distribution comes from: both gasoline and diesel. From these nodes, fuel is delivered either by rail, by road, or by pipe. The final cost depends on the method of transportation. But there is another factor that influences the price. For example, in the Siberian part of the country, in fact, each refinery is a monopolist in its region. And each region there is the size of a good European country. If the plant stops for some reason, then delivering fuel from other regions becomes very, very expensive. Locally, prices can be as high as a hundred rubles per liter.
— What basically makes up the cost of fuel in Russia and how are the prices of oil and gasoline related?
Suverov: If in Western countries the dependence of fuel on oil prices is quite large and the cost of oil is the main component in the price of gasoline, then in Russia the situation is a little different. In our country, 70% of the cost of gasoline comes from taxes, and only about 10–15% comes from oil. Therefore, in our country, the price of oil is not the main factor in pricing the cost of petroleum products.
— In 2023, gasoline prices in Russia increased by an average of 7%, and diesel by 10%, which is almost within the inflation rate. What prices will we see this year?
Yushkov: If we take into account the realities of today, then we will probably meet the inflation rate. But the question is: what will inflation be? I think 6–6.5% is quite possible. And the average price of fuel across the country will rise by the same amount.
Pikin: Within this year, the price dynamics for diesel and gasoline will be different. Let me remind you that diesel is what we export, but gasoline is practically not exported. Therefore, for gasoline, we will meet inflation one hundred percent. It’s hard to say with a diesel engine. The global rule—the cost of fuel at retail does not rise above inflation—has been working properly since 2018. This is an axiom.
How the price of Brent oil has changed over the past three months, dollars per barrel
November 16, 2023 77.42
November 29 82.88
December 12 73.24
December 26 81.07
January 8, 2024 76.12
January 26 82.95
February 2 77.33
February 9 82.19