The average price of the most widely traded Russian oil grade, Urals, amounted to $77 per barrel by the end of March, as reported by the Ministry of Economic Development. This represents an increase from $44.59 in February. The positive aspect of this nearly twofold increase is the boost in government revenue from oil production in April. Conversely, rising prices also impact Russian oil refineries (refineries), which could lead to increased prices at gas stations.
Experts consulted by "RG" are confident that wholesale fuel prices will rise; however, the increase is not expected to match the oil price surge. Retail price growth is likely to align closely with inflation levels. Furthermore, the profitability of oil refining and retail fuel sales will decrease.
It is important to note that the rise in the price of Urals oil does not mean that Russian oil companies sell oil to domestic refineries at $77 per barrel. The price provided by the Ministry of Economic Development is utilized for tax calculations for oil companies, which are based on all crude oil produced in the country for the previous month.
Payments for March will be made in April. This clarification is significant. At the Urals price of $77, the tax share that companies must pay for each barrel is around 65-68%. Therefore, the mandatory tax portion of the Urals price in April alone amounts to $50, exceeding the full Urals cost from the previous month. This is why the primary increase in oil prices in the domestic market is expected to occur this month.
According to Reuters, citing trader data, the price for a ton of Western Siberian oil supplied to the Russian internal market skyrocketed in April, averaging around 32,600 rubles compared to March, reaching 59,000-60,000 rubles per ton.
Thus far, there has been no significant reaction on the exchange to this price rise. Prices for AI-92 and AI-95 gasoline are near maximum levels for this year but still below last autumn's peaks. However, considering that April has just begun, the rise in domestic oil prices may not yet reflect in trading.
In the price of a liter of gasoline in Russia, the oil component fluctuates between 15% to 35%. The higher the oil price, the larger its share. Moreover, the increase in export prices for oil and petroleum products does not translate directly to the retail and wholesale prices for gasoline or diesel. This is due to the structure of the domestic tax system.
Russia operates a reverse excise mechanism for oil supplies intended for domestic processing. This mechanism partially compensates for tax payments made by refineries. It includes a damping mechanism that provides partial budget compensation to oil companies when fuel is supplied to the domestic market at prices lower than export prices. The amount of compensation is directly proportional to the difference between the export alternative (prices in Europe) and the indicative price set by the government for the internal market. The damping mechanism can also be negative, implying that when export prices fall below indicative prices, oil companies must pay the budget the resultant difference. This scenario occurred in January and February (with payments in February and March), resulting in a loss of 33.8 billion rubles for oil companies over these two months. However, in April, they may receive, according to various estimates, around 150-200 billion rubles from the budget. What remains uncertain is whether these payments will cover past costs and the decline in refining profitability.
As noted by Yuri Stankevich, Deputy Chairman of the State Duma Committee on Energy, if the cost of oil entering refineries rises significantly, the margins for these facilities sharply compress without compensatory mechanisms. To restore these margins, refineries are likely to seek higher gasoline and diesel prices. Therefore, short-term pressure on wholesale and retail prices is inevitable. Retail prices tend to respond more weakly and with a lag, due to the damping mechanism's influence and an unofficial mandate to restrain socially-sensitive prices. However, the high share of taxes in the price of a liter (60-70%) makes the end price less volatile compared to raw materials.
According to Sergey Tereshkin, General Director of Open Oil Market, three-quarters of Russian oil refining is carried out by vertically integrated oil companies (VINKs), which manage the entire production and supply chain, from the well to the gas station. Oil-producing companies are unlikely to base the prices they charge their subsidiaries, which own refineries, on global prices, even with tax control over transfer pricing.
Higher procurement costs for raw materials are typical for independent refineries; however, such refineries comprise only a quarter of primary crude oil processing and an even smaller share in gasoline and diesel production. Consequently, despite global price increases, it is deemed unnecessary to overly dramatize the situation for Russian oil refining, according to the expert.
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 prices in wholesale will undoubtedly increase. Despite export bans and geopolitical factors, Russia remains a part of the global oil and petroleum product market, which continues to influence the domestic market, thereby reducing the damping effect.
Stankevich clarifies that the damping mechanism merely smooths out external pressures on the market but does not entirely neutralize them. In conditions of sustained increases in oil prices, it is challenging to fully contain wholesale price rises. Moreover, the damping mechanism does not always completely offset rising raw material costs. Its formula contains coefficients that may lead to "undercompensation" during peak periods.
Indeed, there were earlier assessments indicating that the damping mechanism struggles to adequately compensate for oil companies' 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 domestic prices from global ones. Europe is a net importer of oil and petroleum products, and the prices of extracted raw materials and produced fuels in the country are essentially tied to European prices.
From the viewpoint of Sergey Frolov, Managing Partner at NEFT Research, this is impossible under the current tax system. The tax maneuver—eliminating export duties on oil and petroleum products while increasing the mineral extraction tax (MET)—is viewed as a mistake that simplified tax deductions from the sector but simultaneously placed Russian oil refining on the brink of profitability. Profitability in recent years has primarily relied on damping payment schemes, which were originally a temporary measure that functioned adequately within a narrow range of external and internal conditions (hence requiring continuous adjustments).
Stankevich believes that under conditions of zero export duties and the current MET formula, it is virtually impossible to completely detach domestic prices from global ones without reverting to a stricter state control system or segmenting the oil market.
At present, it is economically indifferent for oil companies whether to sell crude oil for export or on the domestic market; they orient themselves based on global prices after subtracting logistics and duties. To "untie" domestic prices, either a regulated (administrative) oil price for refineries must be established, the MET must be radically modified to detach it from global prices, or there must be tax differentiation for crude oil supplied to the domestic market. All three options imply losses in budget revenue or redistributions, distorting incentives for extraction and raising risks of shortages or cross-subsidization.
On the other hand, Vyacheslav Mishchenko, head of the Center for Analysis of Strategies and Technologies for the Development of the Fuel and Energy Complex, posits that we should focus primarily on creating our own market and direct pricing mechanisms without relying on international oil price benchmarks. In establishing these mechanisms, it is vital to remember that the domestic market is currently a priority. While we should develop oil export supplies, this should only occur after meeting the needs of the domestic economy. This raises the question of equal profitability for exports and domestic market supplies. Traditionally, the sector operated under the "export alternative" principle, where domestic supplies to refineries should not be less profitable for oil companies than exports.
According to the expert, it is not entirely correct to use administrative measures and state price regulation to create a domestic market. Conditions must be established to develop our pricing mechanisms—export quotes for Russian oil and internal market prices. In this pairing, the new tax system should ensure that exports and domestic supplies are equally profitable for refineries. However, this new system must be built correctly, in stages, without excessive administrative regulation and by listening to and understanding the market. Doing so would make it resilient to shocks, such as the current global energy crisis.
Source: RG.RU
