Fuel shortages if free prices are not allowed

Montenegro is facing a complete shortage of fuel at gas stations in the next few days, especially Euro diesel, unless the Government repeals the regulation on retail price setting on Monday and allows free price formation, a request sent to the Government by the Association of Oil Companies.

According to information from "Vijesti", the largest suppliers have already announced the interruption of fuel supplies to their partners in Montenegro since Friday because Euro diesel is now about 40 cents more expensive per liter on international exchanges compared to the current price in Montenegro, meaning that traders have been losing 40 cents on every liter sold in the last two days.

Video: TV Vijesti, Drago Matović

The Association of Oil Companies of Montenegro (UNKCG) warned yesterday afternoon that there is a serious risk of an interruption in the fuel supply to Montenegro, because fuel prices from suppliers are 30 percent higher than the prices currently valid in Montenegro.

Minister of Energy and Mining Admir Šahmanović told TV Vijesti yesterday that he expects the price of Eurodiesel to increase by 14 cents, that there will be no shortage because the reserves that are being formed have enough fuel for a month, and that he knows that there have been suspensions of imports since Friday, but that others have continued with purchases.

The price increase did not cover the entire growth

According to the current formula in the regulation, Euro diesel should increase in price by 16 or 14 cents from midnight on Monday, but retailers will still lose about 24 cents for each liter sold and they should suffer this for two weeks until the new adjustment.

As explained to "Vijesti", the entire increase in oil product prices that occurred on international stock exchanges in the past eight days did not enter the comparative period for calculating retail prices under the existing regulation, and the increase in prices on stock exchanges and with suppliers continued even after the cut-off was taken on Friday at noon for the purposes of the formula for calculating domestic retail prices.

Fuel suppliers, even those who have their own companies - subsidiaries in Montenegro, have informed customers that they will not send fuel to Montenegro at these prices that are currently in effect and that would be in effect from Tuesday according to the regulation, unless the Government allows price liberalization so that selling prices in Montenegro are higher than purchase prices and can cover all other costs.

Real increase at the level of the entire excise tax

The temporary lifting of this regulation would mean an increase in the price of Euro diesel by about 40 cents per liter starting Monday, and they would change daily depending on market prices.

The Excise Tax Law allows the Government to temporarily, due to market problems, reduce excise taxes by 50 percent. However, in the case of Euro diesel, this would mean reduced prices of about 25 cents per liter, through a reduction in excise tax and a lower VAT rate due to a smaller base. This reduction would not be enough to mitigate the rise in prices in the market, and the law does not provide for the complete abolition of excise taxes.

It is possible that the Government will decide today on a combination of methods, namely reducing excise duties by 50 percent on Eurodiesel while lifting restrictions on price increases. This would lead to an increase in the price of Eurodiesel by about 15 cents, while at the same time allowing retailers to continue with purchases and avoiding supply disruptions.

The main reason why Montenegro is more sensitive to major changes in the oil derivatives market is that it is one of the few countries that does not have any oil reserves, although it has been actively preparing them for two years. If there were reserves, the market would be supplied from them now and there would be no risk of interruption of supplies from foreign suppliers and a large increase in prices.

A margin of six cents, the same as in 2002.

Other reasons stem from the regulation itself, as prices are adjusted periodically for 14 days, which is too long a period in cases of dynamic changes, such as the current situation. Countries in the region that have similar regulations have already switched to weekly adjustments.

This controversial regulation has been in force since 2002 and it stipulates that oil traders have a fixed margin regardless of the retail price. Their earnings on Eurodiesel are six cents both 24 years ago and now, although their various costs, especially workers' wages, have increased significantly. Domestic oil companies have been demanding a change to this regulation for years because it does not allow them to accumulate capital for large investments such as the creation of their larger fuel reserves.

In May last year, the Ministry of Energy prepared a new Regulation on Setting Maximum Retail Prices for Petroleum Products, which acknowledged the increased costs of distributing and selling fuel, while the price limit for Super 98 will be abolished and will in future be set only by retailers. However, it was subsequently withdrawn from the agenda of the Government session and was not adopted.

UNKCG: Change the regulation

The UNKCG stated yesterday that the purchase prices of petroleum products on the international market are already significantly above the maximum retail prices prescribed by the current Regulation in Montenegro.

"Today, fuel is sold on the domestic market at prices that are up to 30 percent below stock exchange prices, which means that companies are operating at a net loss. The problem is the existing Regulation that calculates maximum retail prices, which in conditions of sudden and pronounced market disruptions becomes a limiting factor for the continuity and regularity of supply, and does not follow the dynamics of changes on the international market. In such circumstances, the difference between purchase and sale prices is rapidly increasing, which inevitably creates serious financial losses for companies and leads to disruptions in supply chains. If the current conflicts and geopolitical tensions continue, and the rise in energy prices persists, it is realistic to expect that the financial pressure on companies operating on the Montenegrin market will become unsustainable tomorrow," the Association announced.

In such a scenario, they add, there is a serious risk that the continuity of market supply will be jeopardized, which could have far-reaching consequences for the economy, traffic, tourism, and the daily lives of citizens.

"Oil companies in Montenegro operate in a highly regulated environment and continuously ensure a stable supply of energy to the market, with the state generating significant revenues through excise duties, value added tax and other fiscal obligations arising from the sale of petroleum products. The increase in the purchase price will lead to an increase in VAT collection on fuel imports, which creates the conditions for adjustments to other fuel taxes. The UNKCG believes that it is in the interest of citizens, the economy and the state that the regulatory framework is flexible enough to respond to exceptional circumstances on the international energy market," the statement said.

Reserves at a minimum, urgent response required

The current fuel reserves of all sellers, except Jugopetrol, are as much as they can fit in the tanks under the pumps themselves, which is enough for four to five days during periods of normal volume sales. However, sales have increased in recent days due to the announcement of price increases, so it is questionable for how many more days.

According to information from "Vijesti", the situation with Jugopetrol is somewhat better because it is the only one with warehouses in the Port of Bar, but in recent days it has also limited sales to other oil companies in Montenegro that it supplied. Its majority owner "Hellenic Petroleum" also announced that it could suspend new shipments from Monday if prices in Montenegro are not increased, so as not to suffer large losses.

Change the pricing model

The UNKCG called on the competent institutions to urgently consider the temporary deregulation of the existing model of pricing petroleum products, including a possible reduction in excise duties, which they have at their disposal, which would enable a faster response of the system to sudden market changes, with the aim of regular supply and protection of the market from inflationary influences.

"Without a timely reaction from the regulator, the continuation of this trend could lead to serious disruptions in the fuel market, and ultimately endanger the sustainability of the business of oil companies that provide supplies to the Montenegrin economy and citizens. UNKCG remains open to dialogue with the Government of Montenegro and the relevant institutions in order to find a sustainable solution that will preserve market stability, security of supply and consumer protection," the statement reads.