Prices won't fall anytime soon, state should reduce duties: Stern for "Vijesti" on stock market developments and recommendations for the Government

The simplest way to mitigate the large increase in the prices of petroleum products is for the state to temporarily reduce its duties that are included in the retail price. It is not fair for the entire burden to be shifted to traders and citizens, and for the state to earn on the price increase through a larger VAT base. The state should agree with importers and traders of petroleum products on a fair margin that would cover their real costs and enable them to continue supplying citizens and the economy, he told "Vijesti". Davor Stern, a well-known expert on the oil industry, long-time director and board member of INA, former Minister of Economy of Croatia, and director and board member of several international companies.

He does not expect oil prices to return to the period before the new war in the Middle East anytime soon, because there is no end in sight, and much of the oil infrastructure has been damaged and it will take time to rebuild it and normalize production once the war ends.

"It was to be expected that there would be disruptions in the oil market. I expected that there would be a greater increase in the stock markets in the first days of the war, however, it is obvious that the stock markets are not reacting as they used to react to rumors, people have become more cautious, so the price increase occurred quite gradually. I expected that a barrel would be over a hundred dollars on the first day, but it did not, but we have now skipped it. The fact is that these prices will be there until the war activities stop, and they will not drop quickly, as they did before, because a lot of the oil infrastructure has been damaged and it will take time to repair it. And the end of the war is also uncertain, according to today's statements, everyone is threatening everyone with doomsday, so we will see," said Stern.

When asked whether the announcement by large countries that they would release some of the fuel from their reserves onto the market could affect price reductions, he said that experts do not recommend this and that it is better to act by reducing state duties.

"I am otherwise against releasing reserves, they are kept precisely because they are used when there is really no supply. This is something that is used as a measure of last resort. I am in favor of Croatia not releasing fuel from its reserves. Reserves are usually purchased at lower prices and when they are used up, the price will be higher again and the state will have to tap into the budget to buy those quantities again. I think it would be much smarter for states to try to repair these price peaks and to react in a timely manner. To unfreeze prices where they are frozen, to introduce market liberalization where there is no market liberalization, to somehow agree on margins with distributors, and for the state to retain the total revenues per liter that were before the increase and thereby compensate for the increase in prices. Because the fact is that when prices rise, state revenues are higher, and the burden falls only on distributors and buyers, which is not fair," said Štern.

Regarding the situation in Montenegro, where the state has not yet formed its reserves but has stipulated by law that private companies must have certain quantities in reserves, Stern says that it is common practice in some countries that everything must be defined and that it is important that this burden does not fall on suppliers.

"States keep their reserves with traders or agree with traders that they keep reserves for the state. However, in any case, this must not fall on the traders. These are services that traders provide to the state, and states have their own reserves through that. The only way is to subsidize prices in some way, so that there is no major impact on consumers, for the state to give up some of its super profits that it would receive in conditions of increased VAT and excise duties," said Stern.

The Association of Oil Companies of Montenegro warned last weekend that retail prices of petroleum products set by the state are significantly below purchase prices. Stern says that in such cases, the best combination of measures such as lowering duties and negotiating margins with traders is to allow them to continue operating.

"Neither is a quick and complete liberalization of prices good, but a combination of measures. Primarily, I think that the state, and that is the simplest, has a mechanism for that, and must help with those prices through the instrument of VAT and excise duties. That the state should limit the amount of duties and use that subsidy to finance the price of fuel for traders and citizens," said Štern.

When asked whether it is realistic to expect traders to sell fuel at lower prices than it is purchased for and that if this continues for a long time it could lead to shortages, he said that this is the path to ruin.

"Such a situation can and will lead to shortages. For now, there is still diesel at high prices, however, it may happen that there will be none because the diesel also came from parts that are under, let's call it, the Strait of Hormuz sanctions, that is, they cannot pass through the strait from those countries where it was produced. So the state must be sensitive in that segment towards importers and distributors and do everything to prevent shortages. And it can only do that if it is flexible in its expectations and, if nothing else, it needs to dig into the budget to compensate for losses that it is not fair to pass on to traders," said Štern.

When asked if he was familiar with the regulation on how retail fuel prices are determined in Montenegro, that they are adjusted every 14 days and that the margin for retailers has been the same for 24 years, at around six cents per liter, he said that there should be a shorter deadline for adjustments, and that it is not profitable to do this business on the same margin that has been in effect for 24 years.

"Two or three days would be too short a period to align retail prices with stock market prices, but once a week would be correct, provided that the calculation is based on the average value from the stock market on the last few days of the period, not on that day. And that would be much more correct. It is specific to the oil industry to set a limited margin, while this is not done for banks, for example. Banks are expected to make a lot of money, while distributors and traders of derivatives are doomed to losses in crises like this. If the margin has not increased in 24 years, I don't know who is still selling derivatives in your country because that is the road to ruin. Maybe prices should not be liberalized completely, but margins should be allowed to grow in line with objective costs," said Štern.

Sanctions on Russia expected to be eased

He expected that America would ease sanctions on Russia in the sale of its oil, which has been "stuck at sea," meaning that it has been loaded onto tankers for a month.

"However, it is very unstable, it is difficult to control when the oil is loaded. The papers can be, I wouldn't say falsified, but corrected, so in a way it is a slight easing of sanctions. However, the European Union is against it because they believe that it is helping the Russian war machine in the fight against Ukraine. Ukraine has also raised its voice against it. However, it will have to be done because Russia is still a large oil reservoir for Europe," said Stern.

Kerosene price rises and consumption falls, general crisis unlikely

When asked how rising prices could affect the airline industry and tourism, Stern said that the price of kerosene is rising and there is not enough of it on the market.

"However, with many flights being canceled, there will be a reduction in kerosene consumption, so I do not expect a dramatic increase in prices," said the interlocutor of "Vijesti".

Asked whether general inflation could occur and whether we were at the beginning of a new economic crisis, he said that he would not agree with that.

"We had approximately the same prices for oil and derivatives in 2022, and then producers and traders raised prices accordingly, and later did not lower them. Inspectorates or some bodies that monitor this in your country should say that there is no increase in prices or reduction in quantities for a certain product," said Štern.