Fuel Price Puzzle
21 June, 2012
Fuel Price Puzzle

Georgian oil product retail prices have shrunk just by 4% in spite of about 20% drop of international oil prices. Critics believe, monopolization of the market as well as restriction in supply markets are the key reasons. 

Oil price dropped by about 20% from USD 122 per barrel to USD 96 since April of 2012 but prices on Georgian oil product retail market reduced reluctantly  just by 10 tetri.
Sector pundits say the market is monopolized just like in all countries including developed ones, as high barriers hamper new market players to enter the market and make it more diversified. The problem is now aggravated by exclusion of Iran from the market. To alleviate the monopolization problem, Germany decided to set up a special regulatory body - Petrol Police - obliging all petrol station owners to report to the government reasons of each price fluctuation and also disclose details of their bulk fuel purchase deals. That way German government wants to hamper the price manipulations in the sector.
Vano Mtvralashvili, Chairman of the Union of Oil and Oil Product Importers and Consumers, presumes this is just a pre-elective trick in Germany and Georgia does not needs to follow this sample and establish any additional regulation of oil prices for Georgian oil market is quite diversified and offers reasonable prices. 
“Do you think the state will allow companies to work on an unreasonable profit margin if it boosts inflation? No way. Companies have their transportation costs and all is registered at customs and the state is in course of each detail.  The price here is based on a reasonable profit margin that enables companies to develop,” he elaborated.
The fact that prices did not ease in Georgia in spite of 20% drop at the international market is importers imported by 16 thousand tons more fuel in March  when prices hit records and nobody knew what was in prospect.
“And although prices start falling in May and slipped down by 20-30% at international market retail prices in Georgia could not fall immediately for companies bought it at higher price in April,” Mtvralashvili said in the interview with Georgian Journal. “Now prices were two times reduced by 5-5 tetri and the trend will go reducing.”
When commenting slow pace in price slump when international market eases Georgian oil product importers always claim they made bulk procurements when prices were high and wait till the reserves are sold out.
Another key factor prices did not drop is big demand. Actually due to high prices 70-80% of consumers moved on car-gas that is by 50% cheaper [GEL 1.10] than Premium but demand for petrol did not wane Mvtralashvili assures that keeps prices high. 
There are four key oil and oil product importers in Georgia including the Azeri state owned Socar, Wissol, Romanian Romeptrol, and Russian based Lukoil. All of them offer similar prices with one single exception for Regular: Lukoil fixes 2.15 and Romepetrol GEL 2.17 for Regular. Other prices are just streamlined: GEL 2.50 is fixed for Super and ranges down to GEL 2.30 for Premium, GEL 2.20-2.15 for Regular and GEL2.35 2.15-for Euro diesel and ordinary diesel respectively.
Actually Socar and Lukoil both import oil product from neighboring Azerbaijan [Lukoil has its plants there] but prices still stand in line with the petrol Wissol and Romepetrol do import from Italy and Romania.
“How is it possible that Socar and Lukoil importing product near here by train will be fixing similar prices as Romepetrol and Wissol importing from Europe by sea, and how prices in Armenia where petrol goes through Georgia is cheaper than in Georgia if there is no cartel agreement here?” Ditrikh Muller, an expert with Georgian Investment Group, wonders. “Companies are working on high profit margin obviously.”
In Armenia petrol price is by about 27 tetri cheaper than in Georgia while transportation costs are obviously high for importers to Armenia cross Georgia on their way.
Mtvralashvili explains this by lower customs tariffs in Armenia, law product quality and contraband, while in Georgia all imported product is high in quality, completely registered and taxed.
Diesel in Armenia is taxed by 10% of customs toll while Georgia taxes it by excise GEL 150 per ton plus 18% of Value Added Tax (VAT). Besides, Armenia unlike Georgia is supplied by Iran and Russia that from political points of view is interested to provide its strategic partner in the region by discounts in petrol prices.
“We imported 800 thousand tons of oil products in 2011 while Armenia registered only 300 thousand. How could such a difference be if there is not unregistered product?” Mtvralashvili elaborates adding that contraband always cuts prices down. He also accentuates on petrol station infrastructure development costs that differ between Armenia where this network is underdeveloped and Georgia with state-of-the-art petrol stations.
According to Nodar Khaduri, an economic analyst, oil product market in Georgia is monopolized because it is difficult to smaller companies to enter the market that creates quota barriers. Small companies cannot afford purchase sufficient big quota at international market that automatically rejects them. 
“Oil product supply is monopolized in all countries, not because that oil sector is not interested for business but entrance barriers are high. In Israel for example the government sells quotas [to control the price]. This is problem especially when Iran is removed from supply sources and I would not rule out manipulations,” he said.