Fuel – honk and reality

Nino Arveladze

The population has got used to high price of oil, there are very interesting economic novelties in the world. None of economics’ fathers has made the calculation that when the price of fuel grows, which is a multiplicator, the economy grows as well.

The economy is growing in Europe, America and Asia. Simultaneous growth of petrol prices and the economy is an unintelligible phenomenon, but there are a lot of levers for regulation of prices, inflation and business there. In Georgia, compared to the giant companies, business works for comparatively minimal profits. It must be said that when the matter concerns giving a signal for reducing the price of petrol it is a cheap trick. It is impossible that the price of petrol will not rise, the logic of the world development, fuel consumption and supply has this kind of trend – according to one information we have reserves for 50 years, according to the other one – for 130 years, but if the consumption in China rises, this data will change again.
At the beginning of September the price of a barrel of oil was fixed at the level lower than 65 USD, but in the middle of the month the fuel’s price index continued its rising again. A group of politicians involved in the election campaign demand that the Georgian companies should reduce fuel prices and call drivers to give a signal at the agreed time as a sign of protest. The experts’ opinion fixed a different position – they believe that the politicians’ protest is just a part of their PR actions and that it is impossible to change the price by means of exclamations.
In view of changeability of oil products’ prices, on September 8 the Union of Producers, Importers and Consumers of Oil Products held a briefing, at which they produced the list of filling stations that import fuel from Azerbaijan:
Ltd “Kekani” (Agmashenebeli Lane), regular – 1.30 GEL; diesel – 1.32 GEL
Ltd “Aviasatsvavservisi” (Agmashenebeli Lane), regular – 1.42 GEL; diesel – 1.36 GEL
Ltd “Giorgi 2004”(Agmashenebeli Lane), normal – 1.35 GEL; diesel – 1.35 GEL
Ltd “Natsionali” (Agmashenebeli Lane), regular – 1.40 GEL; diesel – 1.36 GEL
Ltd “Nikala” (Agmashenebeli Lane), diesel – 1.32 GEL
Ltd “Martvili” (Agmashenebeli Lane), regular – 1.40 GEL; diesel – 1.32 GEL
Ltd “Slavoil” (Agmashenebeli Lane), normal – 1.30 GEL; diesel – 1.30 GEL
Ltd “Evrazia” (Agmashenebeli Lane), normal 1.28 GEL; diesel – 1.34 GEL
I/e “Lekishvili” (Agmashenebeli Lane), regular -1.30 GEL; diesel – 1.30 GEL
Ltd “Maiko” (Agmashenebeli Lane), normal – 1.33 GEL; diesel – 1.40 GEL
I/e “Sturua” (Agmashenebeli Lane), regular – 1.32GEL; diesel – 1.33 GEL
Ltd “Kentavri” (Agmashenebeli Lane), regular – 1.38 GEL; normal – 1.33 GEL
Ltd “Magoil” (Agmashenebeli Lane), regular – 1.34 GEL; diesel – 1.38 GEL
Ltd “VT” (near “Sarajishvili” underground station), regular –1.37 GEL, diesel – 1.37 GEL
Ltd “Grandi” (Varketili), regular – 1.35 GEL, diesel – 1.37 GEL
Ltd “ Nakaduli” (Moscow Avenue), normal – 1.35 GEL; diesel – 1.36 GEL
Ltd “Giooil” (Moscow Avenue), normal – 1.35 GEL, diesel – 1.33 GEL
Ltd “Dako” (Ketevan Tsamebuli Street), normal – 1.32 GEL; diesel – 1.35 GEL
Prices of non-European products are also reduced at those network companies’ filling stations, which carry out importing and selling of non-European products along with European ones. For instance, in the network of Wissol company 1 liter of Azerbaijani diesel costs 1.35-1.40 GEL, while Azerbaijani petrol – 1.45-1.50 GEL.
As to the fuel imported from European countries, its price is always 10-15 tetri higher than that of Azerbaijani one. A comparatively low price of fuel imported from Azerbaijan is stipulated by the following factors: 1. Azerbaijan supplies fuel to our country with a discount – the fixed cost minus 48$. 2. Fuel import from Azerbaijan is implemented in small lots, by means of 60-120 ton tank-wagons; the minimal lot of fuel being imported from Europe makes up 2000 tons and its transportation is carried out by tankers only, which requires additional 2 weeks. Import of oil products from Azerbaijan is implemented in much shorter time. According to the existing information, the companies that are importing European oil products have already purchased oil products at the new prices, the ships of some them are currently being unloaded at Poti port and this week they are planning to lower the prices of European oil products.
At the same time, it should be pointed out that in August, i.e. during the period when the prices of oil products were very high, the amount of imported petrol made up 40374,6 tons, while in previous months it had been far less:
The mentioned naturally shows that a certain period of time was necessary for the accumulated reserves purchased at high prices to be ousted from the marked and substituted for the new comparatively cheap fuel.
Georgian importers give their explanations, but what decision will be made by OPEC, why is it impossible to reduce the price of European fuel, what difficulties does its importing to Georgia related to and why has fuel become a merely political product? International experts make forecasts of the expected fuel prices, but activation of the new Asian markets, such as China and India, turn any calculations upside-down. The Chairman of the Board of Directors of JSC Wissol Petroleum Georgia Soso Pkhakadze speaks on the issues related to above-stated.
– In your opinion, what amount of petrol is consumed in Georgia and what are your calculations based on?
– According to the data of the customs, 152 000 tons was imported in the first half of 2006, while in 2003 – 112 000 tons. As to diesel fuel, 38 000 tons was imported in the first half of 2003, while in 2006 – 151 000 tons. In principle, this corresponds to the changes that has taken place in the company. We almost could not sell diesel. In August we sold about 10 000 tons of diesel fuel.
– There are two opinions, some experts say that petrol consumption in Georgia makes up 600-700 000 tons, while others maintain that this indicator is at the level of 400 000 tons. As to diesel fuel, they say that its consumption makes up 300 000 tons, and the third segment is the cars working on gas. According to the calculations, about 600 000 cars are registered in Georgia, of which 200 000 ones working on diesel fuel. In percentage terms, 60% of cars work on petrol, 20% – on gas and 20% – on diesel fuel. What are your calculations based on?
– As to the statistics, in comparison with 2003 and the previous years, a year and a half ago legalization of this business took place. This has had an effect on budget revenues and, which is important to us, this has had an effect on the sales. The volume of our sales has increased almost 3 fold. Last year we paid 37 million GEL to the state budget; this year, proceeding from the results of the first eight months, we shall have to pay about 50-55 million GEL. As to the concrete figure, in relation to the import of petrol and diesel fuel, I declare that there is almost no contraband of gasoline, though it is possible that a small amount of unaccounted gasoline can still be imported from Azerbaijan. According to our information, the existing consumption is equal to the figures fixed at the customs. It is possible that this figure needs to be rechecked, though in the first six months of 2006 152 000 tons of petrol and 151 000 tons of diesel fuel was sold. According to the data of another association, we have the same figure. As to diesel fuel, it can be said that we did not increased our sales, but started from scratch and reached the level of 10 000 tons a month, contraband was eradicated the situation has improved considerably.
– What is the percentage of contraband petrol today?
– It can be said that it does not exist.
– And what about diesel fuel?
– According to the authorities, there is no contraband of diesel fuel, but I think that it can still exist in small amounts. The volume of contraband imported by means of small vehicles is very small and may not exceed 1%. As to the gas sector, it is natural that during the last two years, especially after Catherina hurricane, the corresponding companies became more active. In this relation we have carried out a research, since we interested in the situation in other countries. According to our information, about 8-10% of cars in Georgia work on gas, it is most widely used by taxis and big motor vehicles that used to work on petrol. For comparison we have studied the largest gas markets – Argentina and Brazil and it turned out that every fifth car there, i.e. 20%, work on gas. There are no similar indicators in any other country; Turkey has a population of 72 million people, all taxis work on gas and gas filling stations are being actively built there. Making of natural gas compressors has also started in Italy and China. In some countries gas is not used for these purposes at all, but the trend is that the majority may choose to switch to gas. It is difficult to say it in percentage terms, I officially asked for the data as to how many cars are in Georgia now, but I could not find the exact figure. Taking into account what is happening in other counties, we believe that fuel prices we basically remain unchanged.
– What will be the approximate price of fuel?
– According to the IMF, next year the average price of fuel will be 75 USD/barrel. One of the European investment funds declares that the price will make up 65 USD, Russia maintains that a barrel’s price will fall to 50 USD, but in the middle of September rising in price of oil was fixed again. Thus, from my point of view, it is impossible to make an accurate forecast at his stage, it mostly depends on the political situation. Probably, it will be ranging from 75 to 80 USD, and that of petrol – from 760 to 800 USD/ton.
– Let us formulate the question in the following way: why should the petrol price fall in the world? According to the data, daily oil production makes up 83 million barrels, and 92 million barrels is expected in 2010. It is an interesting forecast, but China has turned all the forecasts upside-down.
– In principle, if we trace the market mechanisms in the past 7-8 months and correlation of the demand and supply, it can be said that now OPEC produces 28 million barrels a day, which approximately makes up 30% of the total production, and the demand and supply are balanced, if we do not take into account August, which is the period of peak consumption; except for this period, there were months when the demand was less than the supply.
According to our information, China has a population of one and a half billion and there are only 30 million cars there. If 20% of Georgia’s population have cars, in China this indicator makes up 1%. Taking into account the fact that for years the Chinese economy has been growing by 10%, it is clear that in two or three years there will be 100 million cars there. The same can be said about India. Only this factor is enough to suppose that oil price will not fall but, on the contrary – it will rise. Unfortunately, oil has become a merely political product, that is why it is impossible to rely on forecasts only. What is going on in this sphere in the world is really beyond explanation.
– Formulate the anatomy of prices, how they are formed in Georgia, what percent share is left for the producer, etc. How is petrol price fixed in the world and what kind of effect it has on us?
– Georgia is an oil-consuming country and is fully dependent on import. All businessmen in this sphere, including our company, are fully dependent on the price existing on the international market. I should necessarily draw attention to the logistic chain – finding of a ship, purchasing of the product, loading of the product, its transportation to Poti, unloading at Georgian ports, transportation of the unloaded and custom cleared product to Tbilisi and then its distribution to filling stations. All this requires about two weeks and, besides, this concerns the companies that have a well-arranged business. Small companies need more time to do all this.
In general, as to the price indicator, I would like to say that there is “Brent” type of oil in the North Sea and any purchase made by an oil company or some other consumer is orientated for it. The price of this oil is fixed at the exchange at 17:30 London time, it is Brent crude oil that has the highest quality in the North Sea, it is the main indicator and oil product’s prices are based on it. In other words, Brent price becomes known and then the price of other oil products is formed, in the evening the price is determined by “Platts”. “Platts” is an American organization that collects information on deals during the day, makes analysis on the basis of the obtained information and determines the price of petrol, i.e. in 99% of deals a concrete price is fixed. After the quotation has been established, we rely on the information of the so called Mediterranean, Italian “Platts” – on the next morning we learn the price of petrol or diesel fuel that was fixed and take a corresponding decision. It is natural that we shall not purchase fuel if large reserves of petrol have been accumulated, but if the reserves are small and import needs to be implemented, we have two options: either to import non-European product from the neighboring country – Azerbaijan, which will require 3-4 days, or choose the other aforementioned option, which will require two weeks. Any company working in Georgia can do one thing only: either to affreight a ship for transportation of fuel from Europe or, in case of importing from Azerbaijan, to load the product into tank-wagons at an oil refinery, pay the money and bring it to Georgia. We are unable to take any other actions and do not have a lever for influencing the prices. Thus it turns out that if the price at the exchange is changing every day, we are able to change and fix the price of European petrol twice a month only.
– How did the price of petrol change in September?
– In August we purchased 5 000 tons of fuel, then a ton cost about 800 USD, and it is being sold during September. As to the new lot, we shall know its price at the moment of a tanker’s affreightment and loading with fuel. This is a general pattern both in the world and in Georgia.
– Let us say that the purchasing price of a ton of fuel is 800 USD. What is the price of fuel filled up in a car’s tank in this case?
– When the price of a ton was 800 USD, a liter cost us 1.53 GEL. In view of the fact that we could not rise the fuel price in Georgia higher, we had to work almost without profit.
– In our case, is there a serious tax in comparison with the rest of the world? What is the tax per ton of petrol?
– About 200-300 USD, and it depends on oil price on the international market. The excise makes up 250 GEL, so it is additional 18%.
– How much does it make up in petrol price in percent terms?
– If petrol costs 800 GEL, it is about 35-38%, but it is less with diesel fuel.
– In your opinion, what mechanism does Georgia have so that that the price of oil should not rise catastrophically? It is a fact that we are a country attached to “Platts”.
– In 1972 a barrel of oil cost 2 USD, now – 70-80 USD. Diversification has taken place in America and other countries. Coal was substituted for diesel fuel. The share of petrol in America’s consumer basket is reduced 2-3 fold. As to the situation in Georgia, it is natural that it is impossible to reduce or rise the price by honking. It is regulated by the market mechanism only. Georgia is unable to have any effect on fuel price, moreover, two months ago, when the price of petrol was very high, in order to retain the margin the price should have been more than 2 GEL. However, it is clear that we could not raise the price higher than 2 GEL. This is also explained by the balance in supply and demand. If we had raised the price, the demand would have been reduced so much that our work would have become senseless. The current price of fuel in Moscow makes up 20 rubles, Russia is the second largest oil producing country and Gazprom is the largest producer of natural gas in the world. If a Russian producer can sell its product abroad and get a price that is higher than the one on the domestic market, it is sure to do it, unless its activities are restricted by the corresponding measures. That is why in the countries where oil is produced and processed the oil price is also high. America is the world’s fifth largest producer, but a high oil price is fixed there as well. There is the international price as well as producers, processors and final sellers of the product and they will not sell it below the fixed price either on the domestic market or outside it. However, in Iran this sphere is fully subsidized and there is a low price there. A similar situation is in Turkmenistan. The prices in Kazakhstan are high, i.e. they correspond to the situation on the international market. Kazakhstan has huge oil reserves, but in spite of this fact, the prices are equal to the ones existing on the international market. Otherwise the market mechanisms do not work. One cannot tell the concrete company to reduce the price.
– Let us say that some companies will reduce the price, what will happen then?
– It is possible that in two or three days we shall return to the level that used to be a week or a month ago. Then the price will rise again.
– What should Georgia do from the viewpoint of the state in order to protect the growth of the market, slightly at least?
– I am not really a supporter of tax reduction. Let us say that the tax on petrol is 300 USD and today the product costs 700 USD. Tomorrow its price may rise to 1000 USD, so we shall not achieve any result by lifting of the taxes. As to diesel fuel, here the situation is simpler, the tax makes up about 150 USD, which is not really a big sum.
– Does Georgia have any chance of influencing the price?
– Not a single country has an possibility of influencing it, it also applies to the US and the EU. Even by joint efforts they will not be able to change the price dynamics. However, if we speak in global terms, the political premium in the oil price is very big, about 20 USD. If Iran is left alone and the situation in the East settles down, it will naturally have an effect on reduction of the price. However, there is no point in speaking about it in Georgia. Georgia must develop its economy, contribute to existence of large companies in this and other sectors in order to create new jobs. We have 500 people employed in our company.
– How do you experience the pressure of taxation?
– The taxes are not high. If we say it in simple words, the excise is most interesting. Probably, we should rather think about it. Our company relies on the western business model both in settlements and accounts. As to our strategic task, we would like to be one of the leaders of the Georgian economy and this sector. We are successfully competing with such company as Lukoil, today we are a larger company in Georgia than it is, though its s not the point. The main thing is to render high quality service to consumers, to offer high quality products and have a broad network.
– In what does the investor – Wissol helps you?
– In financing, improvement of quality and management, in relations with banks. All this makes the product cheap and high-quality. We are mainly selling the products corresponding to the European standards.
– How many filling stations do you have in Georgia?
– Now we have 40 filling stations and more than 65 licenses, the construction process is underway.
– Is the Georgian market saturated with filling stations or not?
– Yes it is. However, there are regions where there are no large companies and the level of quality and service is not a proper one. We are building another filling station in Akhalkalaki. I cannot say that it is very profitable, but we are children of our country and should, first of all, think of it. The strength of the Georgian economy is in direct proportion to our company’s activities and vice versa – the strength of the companies like ours stipulates the strength of the economy. I am convinced that at the initial stage we shall not have profits in Akhalkalaki or they will be very small, but the time will come when all regions of Georgia will develop like Tbilisi. I would like to add that we are successfully working in other regions that we entered.
Instead of the conclusion we would like to tell our readers that the analysis of the existing situation in this sphere, both inside the country and outside it, shows that in 2006-2007 the price of Azerbaijani “regular” petrol in Georgia will make up 1.35-1.50 GEL/liter and that of European one – 1.80-2.10 GEL and, unfortunately, honks will not help it.