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Will Moldova return to state regulation of oil product prices?

Will Moldova return to state regulation of oil product prices?

 InfoMarket Comment

 
A wave of discontent rose in January 2020 against the backdrop of changes in retail prices for petroleum products which raised the idea to return to state regulation of fuel prices.
 
Let’s recall that importers raised retail prices by 3 -12% on January 17 citing a number of factors: the annual increase in excise taxes on petroleum products (from January 1, it increased by 1 0%); the situation on world markets, the price of a barrel did not exceed $60 in October-November and reached $69 at the beginning of January; also Leu devaluation recorded in January. The fuel prices were reduced by about 1.5% on January 31.
 
As a result, the media has been promoting actively the idea that the current the method of costs assessment of petroleum products must be replaced by government regulation. 
 
Last Tuesday, the head of the National Energy Regulatory Agency, Veaceslav Untilă asked for parliamentary support to limit tariffs on petroleum products. Veaceslav Untilă presented an analysis showing the need to limit tariffs on petroleum products at the meeting with Speaker of the Parliament Zinaida Greceanîi, requesting support of the relevant government initiative. The parties discussed the necessity to change the rules on the energy market, the issue of renewable energy sources and the situation at the oil market. The speaker emphasized the need for effective regulatory mechanisms in the energics and expressed her readiness to cooperate in the process of improving legislative standards in this field.
 
The oil market is always under special control of the state, society and media. The fuel prices were regulated only by market mechanisms until 2002. The first time government intervened in the regulation of petroleum products prices in May 2002. The National Agency for Energy Regulations (ANRE) adopted a resolution approving the regulation of prices for petroleum products. Then, the rate of return profit for market participants was introduced for the first time. So, it was decided that "the annual rate of return profit cannot exceed 10% of the annual expenses and consumption associated with import and wholesale trade, as well as retail trade of basic petroleum products and liquefied gas." The methodology of the prices formation and application of petroleum products was adjusted in subsequent years while the margin of 10% was maintained.
 
The state decided to introduce prices regulation in the market in 2016: ANRE began to set maximum retail prices once every two weeks since May 2016.
 
ANRE has adopted 56 decisions on the maximum retail petroleum prices within 25 months (from May 2016 to July 2018). ANRE increased petroleum prices 33 times and reduced 23 times based on the situation at world markets, exchange rates and the number of other indicators, within 2 years. This is the trend in world prices for raw materials and petroleum products.
 
But, the prices for oil products in Moldova have been frozen since July 2018. This was due to the fact that the Ministry of Economy of the country appealed in court the procedure for setting the maximum retail prices by the Agency, as a result, the court decided to abolish this practice and "freeze" fuel prices by July 2018 at the established level, until the introduction of the new methodology.
 
ANRE approved a new methodology for the formation and application of prices for oil products in March 2019 with the exception of a new, rather complicated pricing formula, the maximum profitability for importing companies of 10% was returned. The innovations, in particular, have been determined that a number of companies costs will not be taken into account, for example, sponsorship, unjustified in terms of the ANRE costs, etc.
 
By the way, Moldova could really face a fuel shortage in the nine months when prices were "frozen" by the court’s decision. It is well known that almost all Moldovan importers are part of international groups, they import 90% of fuel into the country from Romanian refineries.  Global markets grew in the summer of 2018, so the question was raised by the fall: Why ship fuel to Moldova? Since subsidiaries register losses due to the inability to change prices. The situation changed in the fall of 2018, the world’s prices began to decline at the beginning of 2019, thus companies were able to cover the losses of the summer. Everything turned out well finally but the risks were very great for importers and the country.
 
It should be noted that in countries with market economies, the prices of petroleum products are not regulated by the state. Sales prices are formed at the free markets depending on the existing supply and demand.
 
Immediately after the adoption of the new methodology (which is still effective), companies reduced prices by about 1-3%. We followed the dynamics of prices from that time to the present: the prices did not change for all types of petroleum products at different times.
 
Change in petroleum prices in Moldova from March 2019 to January 2020
 
 

 

March 2019

May 2019

June 2019

August 2019

October 2019

December 2019

January 18, 2020

January 31, 2020

Average for the period

Petrolium-95

-2.9%

+ 6.0%

 

-2.6%

 

 

+ 3.0%

-1.3%

+2.2

Diesel fuel

-0.9%

+ 5.1%

-2.9%

-2.1%

-0.1%

 

+ 4.0%

-1.5%

+1.6

Natural Gas

-3.2%

 

 

-5.6%

-0.5%

+ 3.2%

+ 11.5%

-1.4

+ 4%

By the way, the dynamics of retail prices on world’s markets expected to be decreased at the beginning of February.
 
Importers justifying a change of prices by three main reasons: the situation on world markets, changes of prices from oil refineries as a result and annual increase in excise taxes on fuel which is included in state budget of the country, also fluctuations of the Moldovan national currency against the US dollar (world’s petroleum prices are tied to the US currency).
 
Everything is clear with world’s prices, we can only follow them, considering that it takes 2-3 weeks to import petroleum products to Moldova from the moment of fuel purchase at the refinery to the final destination. The dynamics of the Moldovan currency is not something new. You can pay attention to the annual increase in excise taxes. Their increase of 10% since 2020 led to an increase in the retail price by 2.2% (gasoline); 1.22% (diesel) and 1.01% (liquefied gas). This is the share of excise taxes increase in retail prices in January. 
 
The market operators draw the attention of the authorities to several non-market regulations that directly affect the increase in retail prices in Moldova. Those regulations can directly affect the market.
 
One of the crucial factors is a huge number of gas stations in the country which continues to increase.  There were about 600 gas stations 5 years ago, 710 gas stations are built today and their amount continues to grow. There is no state plan for their placements. The cost of servicing a gas station is about the same, it can sell a ton of fuel per day or 100 tons, the profitability depends on sales. This leads to overestimated costs, so there is a direct impact on the final cost of the product.
 
Importers note a price increase for the services of the Technical Center for Industrial Safety and Certification ("CTSIC" SRL) which being a monopolist in this market. It issues quality certificates for each batch of imported fuel. The cost of this service has grown by 30-40% over the past year.
 
The price is also affected by the fee for trade objects set by local authorities at both retail outlets and gas stations. The problem is that the law does not establish a maximum fee, so the permission of local authorities costs 250 thousand lei per year in some localities (outside the capital). This fee increased by 44% in Chisinau over the past year, by 134% (!) in Balti. These costs are influencing the retail prices.
 
Another important aspect, big companies (transportation and farmers, especially in the period of sowing and harvesting) receive discounts in the amount of 6-7% when signing contracts to acquire large amounts of fuel. Government agencies purchase fuel on a tender basis at the best price with a deferred payment. This means that the final price of fuel influence ordinary drivers mainly.
 
Experts note that changes related to a particular market are discussed without the participation of its operators for the first time in many years. At the same time, the Ministry of Economy already protested in court (the court’s decision was not canceled) the state regulation of retail prices for petroleum products two years ago...
 
Any market, and the economy as a whole, needs clear and preferably medium-term rules of the game. Since the rules are constantly changing, even in the middle of the year, few agencies (especially foreign investors) will show the interest to work, invest or make any plans for the future in the country. Practice has repeatedly proved that there is no alternative to dialogue between government and business for development in the market economy. // 06.02.2020 - InfoMarket.