29 Aug.2019

Defects in the Model of State Regulation of the Fuel Market / Speech Given by Ivan Khomutov at the TASS News Agency

At a round table meeting organised by the TASS news agency, which took place on August 29, 2019, Ivan Khomutov, General Director of the Petromarket Research Group, reported on the analysis of the defects in the model of state regulation of the Russian fuel market carried out in 2019. The TASS round table meeting was also attended by:

• Pavel Karchevsky – Advisor to the CEO and Head of the Department of Federal Government Relations, Gazprom Neft PJSC,
• Sergey Ezhov, Chief Economist at VYGON Consulting,
• Alexey Kalachev, Analyst at the Finam company
• and Alexander Shirov, Deputy Director of the Institute of Economic Forecasting, Russian Academy of Sciences.

The participants discussed the first results of work on the oil industry’s damping mechanism and gave their assessments of the mechanism's capacity to ensure future gasoline price stability.

Representatives of the leading Russian media outlets were invited to attend the event as observers.

In his report, Ivan Khomutov made mention of the fact that in 2019, wholesale and small‑scale wholesale prices for gasoline in Russia were at an extremely low level. The cause of this was the severe restrictions imposed by the regulator on the supply of refinery products to the domestic market. The same restrictions were having a positive effect on filling stations marginality, which lay at a record high between January and April 2019. But it was the refineries that were paying for the high filling stations margins, since they were forced to sell their product on the wholesale market at a huge discount relative to the export alternative. The “damper” intended to offset this was in fact negative during January and February and was therefore unable to solve the problem.

According to Petromarket RG estimates, the net losses of Russian refineries, brought about by the sale of motor fuels on the domestic market during the first 7 months of 2019, amounted to 47 billion roubles. This situation resulted in the country's petroleum refineries sustaining losses right up until May, whilst at the same time less technologically-advanced refineries were exporting and generating profits. In the opinion of Ivan Khomutov, such a situation can hardly be looked upon as healthy, since the regulator is sending the unambiguous signal, that it is better to be a technologically-backward enterprise focused on the export of low-quality oil products than an advanced refinery focused on the production of high-quality fuels for the domestic market. The regulator, whilst successfully managing the routine task of holding down gasoline prices, is at the same time reducing the incentive for development of the oil refining industry in Russia, which threatens fuel shortages and rising prices in the future.