Saturday07 December 2024
kod-ua.com

Fuel prices in Ukraine may rise soon. What are the reasons behind it and by how much can we expect the increase?

While Ukrainians have already adapted to the rapid increase in food prices and adjusted their shopping habits, the rise in fuel prices for vehicles may come as a surprise to many.
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Why Are Prices Rising?

On one hand, there are what can be termed objective reasons for the increase in fuel prices. According to European Union standards, which adhere to the Green Deal (that is, the intentional increase in fossil fuel prices), Ukraine must undergo five stages of excise tax hikes on automotive fuel.

This process began on September 1. At that time, the excise tax on gasoline was raised to €242.6 per thousand liters, diesel fuel to €177.6, and liquefied gas to €148.

The next stage of excise tax increases is set for January 1, 2025. It stipulates that the excise on gasoline will rise to €271.7 per thousand liters, diesel to €215.7, and liquefied gas to €173.

In September alone, fuel prices surged by 6%, but following previous crises in the fuel market during the war, this increase did not elicit a strong consumer reaction. People were expecting worse.

“The first stage of the fuel excise tax increase primarily affected the prices of liquefied gas. Meanwhile, low oil prices and high stocks at gas stations, built up before the excise hikes, restrained the price increases for gasoline and diesel. The comparison base effect from tax changes in July 2023 also had a dampening influence on prices,” the National Bank explains.

They also add a warning: “However, the effect of significant fuel stocks will have a rather short-term downward effect on prices. As these stocks deplete and under the influence of further excise increases and the pass-through effects from the weakening of the hryvnia exchange rate, the price of fuel is expected to accelerate to over 9% by the end of 2024.”

What to Expect Next?

Currently, the average price of A-95 gasoline is 55.7 hryvnias per liter, diesel fuel is 52.2 hryvnias, and automotive gas is 35.3 hryvnias.

“In the currency basket for this year, the dollar was supposed to cost 41 hryvnias, but it is already a bit higher. By the end of 2025, the dollar will reach 45 hryvnias. We will see an acceleration of this process (the depreciation of the hryvnia — ed.) around the New Year. Then, of course, the numbers [forecast for fuel price growth] will roughly align, because a devaluation of the currency by one hryvnia adds about 70-80 kopecks to the price per liter of fuel, depending on the type,” notes Alexander Sirenko, editor-in-chief of the magazine “Oil Market.”

“From January 1, we will see an increase in excise taxes, but this may add only 40-50 kopecks per liter, depending on the type of fuel. So, it’s not critical at all,” he adds.

Gennady Ryabtsev, an energy expert and professor at the Kyiv-Mohyla Business School, also believes that the anticipated rise in automotive fuel prices is not so much due to fundamental changes in the fuel market or a gasoline shortage, but rather due to devaluation trends of the hryvnia.

The state budget for 2025 anticipates a devaluation of the hryvnia to 45 hryvnias per dollar, along with a consumer price increase of around 9.5%.

“The National Bank predicts [price increases] likely because it plans to let the hryvnia fall against the dollar,” the expert says. “If the National Bank does this, then fuel will become more expensive. But if it does not, then fuel prices will not rise either.”

Another factor influencing prices at Ukrainian gas stations is the prices on the global oil market. The price of Brent crude oil has dropped from $91 per barrel in January to $73.1 in November 2024.

Weakened demand from China due to an economic slowdown, the rising popularity of electric cars, and consistently high supply levels from Arab countries have allowed prices to retreat to a relatively comfortable level for drivers.

“Ukraine is critically dependent on imported petroleum products, which mainly come from Lithuania, Poland, and Romania,” explains Artem Kuyun, an expert from the consulting group “A-95.” “Most shipments now come from Romania, but this is not necessarily Romanian fuel. They ship Greek, Indian — any fuel, using the capacities of their ports.”

What Could Curb Price Increases?

A significant factor that could restrain further price hikes for automotive fuel is the intense competition in this industry. There are many fuel retail networks, all competing with each other, sometimes lowering margins or offering special promotions with lower prices.

“During the so-called fuel crisis that occurred at the beginning of the large-scale war, many new players and importers entered the market because our own refining capacity has diminished significantly due to the Russians,” says expert Alexander Sirenko. “They all want to operate, all are bringing in fuel, and contracting it. We have a constant surplus in the market, and margins in the wholesale market have shrunk significantly. Previously, one could earn an average of $20 per ton, but now it’s possible to negotiate only 5 or 10.”

Artem Kuyun from consulting “A-95” also believes that gas stations are more likely to reduce their margins than to raise prices sharply. Moreover, the harvest season has effectively come to an end, so agricultural companies have stopped creating significant demand for fuel.

“We see that it’s already the dead season, sales are declining, and competition is intensifying — there are all reasons to sacrifice margins to maintain sales,” comments the analyst.

Furthermore, gas stations have already accustomed their customers to discounts of 3-5 hryvnias per liter of fuel on weekends.

“Why do they lower prices on weekends? This means they have a good safety cushion,” notes energy expert Gennady Ryabtsev.

Additionally, there are always gas station networks that, for various reasons, are willing to sell fuel cheaper than their competitors, as a fierce battle for the end customer is underway. If any network begins to raise its prices, customers immediately switch to cheaper options.

An additional factor restraining the growth of automotive fuel prices is the mobilization of conscripted individuals. As some areas are patrolled by military recruitment officers, many are reducing their travel, opting to avoid unnecessary movement around the city or country, thereby decreasing the overall demand for gasoline.

Nonetheless, the global oil market can experience both price increases and decreases, affecting pricing at Ukrainian gas stations.

On one hand, among the election promises of newly elected American President Donald Trump was a sharp reduction in gasoline prices, which requires the price of a barrel of oil to be no more than $60, rather than over $70, as it is currently.

On the other hand, potential further sanctions against the shadow oil fleet of Russians could provoke an increase in oil prices, as this inexpensive Russian oil has partially met the needs of large economies, such as India. If India seeks its needs on the open market, prices will rise.

Energy expert Gennady Ryabtsev discusses the possibility of renewed Chinese demand for oil and petroleum products and the market's response. Furthermore, much depends on the actions of Saudi Arabia, which has announced its intention to increase oil production and exports.

However, the National Bank's warning about a likely rise in automotive fuel prices should not be taken lightly.