Straightjacket Won't Help Gasoline Market
Because the world market is to blame for higher prices
All Ukraine's auto lovers have wondered for the past couple of weeks about
climbing gasoline prices and when the process will stop. Indeed, the cost
of this major "social commodity" (perhaps second only after bread) has
been on an upward curve in every administrative region. From May 30 to
June 15 in most oblasts A-76 and A-95 brands, along with diesel fuel, had
risen by 10-30%, especially A-95 in Kyiv, Sumy, and Khmelnytsky oblasts,
the Crimea (26-32%), chalking up UAH 1.05-1.50 per liter. A-76 also set
a record in Kyiv, Sumy, and Chernihiv oblasts, as well as in the Crimea
(39-43%; UAH 0.85-1.00).
The first answers came only late last week. President Kuchma promised
price stabilization of costs once the militia and tax service experts set
to work. Also, heads of local state administrations came up with lighthearted
reports and assurances to pull all their administrative levers to put the
speculators in their place.
Naturally, this readiness of bureaucrats at all executive levels to
straightjacket the gasoline market is explained not only by their surviving
socialist mentality and ignorance of the laws of market supply and demand,
but also by a very special interpretation of the reasons behind the soaring
tab for petrochemical. So what explanations of the price jump are afield?
Ukraine's head of state, without going into details, promptly pointed
an accusing finger at the "crooks" pumping up fuel prices. Rank-and-file
executive bureaucrats were less categorical. Thus, Oleksandr Serediuk,
head of Kyiv's price control inspectorate, attributes the price hikes to
reduced imports from Russia and large importers' negative expectations.
Among other reasons market operators mention the forthcoming stiffening
of government import/export procedures with regard to petrochemicals and
Russia's rising prices. Thus, the roots of this problem seem clear enough.
Let us now try to figure out which of the factors (mentioned or omitted
by domestic market operators) should be taken into account or disregarded,
so as to enter real expense items into individual budgets and not to go
bankrupt already in the second half of the year.
At first glance, events on the gasoline market point to a well-rehearsed
scenario. Only a month ago the situation was normal, no lines at filling
stations, no fuel shortages. And then it began. Prices started to rise
10% every ten days. A plot? Perhaps, except that it was not hatched in
Ukraine. Cabinet and presidential analysts knew, of course, that a month
and one half ago the same thing happened in St. Petersburg and then in
Moscow, with gasoline costs increasing 1.5-2 times. The Russians also thought
it was a conspiracy, but then discovered that the reason was far more prosaic.
One and all in Russia suddenly realized that domestic gasoline prices
(meaning Ukrainian ones as well, given their being closely interrelated)
could not be held back. This understanding emerged primarily due to the
miraculous resuscitation of the world oil market. Russian oil producers,
balancing for the past two years on and below the verge of export profitability,
once again smelled live money in the West and, promptly forgetting about
the stagnating domestic and CIS markets, started selling there practically
all they could get.
And in the West the situation was as follows. World oil prices had reached
the late 1997 level by May 1999, meaning a 50% increment. If one were to
believe the Western media, OPEC was to blame, since it decided once again
to cut oil extraction in late March. This version, however, does not suffice
to explain the wonders being worked on the oil market, so analysts dug
deeper, coming out with at least another three reasons for the boom. First,
the principal oil-importing countries, the US topping the list, suddenly
discovered that their liquid fuel reserves are quickly dwindling. Second,
the long-awaited increase in oil demand began in Eastern Asia. Third, the
price jump was provoked by the Balkan war. The latter factor is no longer
at work, which is quite inspiring. Russian experts point out that the world
market price situation tallies precisely with the scenario played out by
oil brokers during the Gulf War. At the time oil prices also soared, increasing
almost twofold in two months.
Enhancing the security of tankers in the Eastern Mediterranean after
the Kosovo conflict is expected by Western analysts to cause oil costs
to decline somewhat, but this trend may never reach Ukraine, coming to
a standstill in Russia. Proceeds in hard cash have always been the main
source of income for Russian oil producers. It stands to reason that they
should prefer Western exports under all circumstances. And the Russian
government considers oil exports much more important in terms of revenue
than going through the motions of maintaining low retail gasoline prices.
Moreover, it is perfectly safe to assume that Russia's (and, of course,
Ukraine's) gas market will remain hostage to the world market situation
for a long time, for so long as domestic prices remain twice or three times
lower than elsewhere in the world. By way of comparison, A-95 averages
18-20 cents a liter; 28-35 cents in Kyiv, and between 50 cents and $1.00
in the West (depending on the country, specifically that country's tax
laws).
Another price-setting factor in Russia should be taken into account
by Ukrainian car owners: the Russian Cabinet, pressured by IMF, will do
its best to exact all debts from oil exporters and will try to levy a new
tax on filling stations (it failed to push the bill through the Duma on
June 17).
To sum up, (a) we should not count on ever having pre-boom gasoline
prices back; in any case, the behavior of Russian exporters gives no such
indications; (b) Ukrainian administrative efforts may indeed help stabilize
the situation, because, on the one hand, the government is a large gasoline
dealer itself (using its reserves), and on the other, centralizing the
market (in pursuance of the President's recent edict) will, of course,
leave only market operators in good odor with the executive; and (c) even
the most favored of favorites will not withstand the temptation of making
a quick buck playing on the difference between "state reserve" and free
market, even export costs. After all, 100% profits do not come one's way
every day. Incidentally, the Ministry of the Agro-Industrial Complex announced
that its has evidence of "non-targeted use of fuel and seed allocated by
the government to secure agriculture this year." Minister Borys Supykhanov
made no secret of the fact that such seed and fuel are "sold and resold."
Thus, dear reader, if you want to gain rather than lose, take a good
look around. Plenty of business opportunities so long as you get in touch
with the right people. In fact, there is quite a bit of understatement
in Mr. Supykhanov's statement.
By Iryna KLYMENKO, The Day






