Gas station networks have slashed fuel prices, but only for a few days. What’s happening?
What should the fair price of fuel be? How much do networks earn? Why did low prices last only a few days, and should we expect a decrease in the future? Answers to these and other questions are below.
Get it while it's cheap!
On the morning of Saturday, October 19, the leading fuel retailer in Ukraine, OKKO, launched a wave of price reductions on light oil products. For two days, the price of gasoline of all grades dropped by 5 UAH per liter, and diesel fuel by 6 UAH at over 400 gas stations of this network.
That same day, news of discounts began to arrive from other gas station networks: WOG, KLO, UPG, Marshal, and "BRSM" also started offering customers more favorable fuel prices.
The temporary promotion ended on October 21, when fuel prices in most networks began to return to their usual levels. However, some companies slightly reduced prices compared to the pre-promotion level. For instance, OKKO recorded a decrease of 2 UAH per liter of gasoline and 1 UAH per liter of diesel.
The overall situation changed insignificantly: from October 21 to 28, the average price of A-95 gasoline in the country fell by 32 kopecks/L to 55.72 UAH/L, A-95+ by 65 kopecks/L to 58.66 UAH/L, and diesel by 5 kopecks to 51.94 UAH/L.
Why networks offered discounts
Experts and market participants interviewed by EP agreed on the reasons for the temporary "price drop."
"Currently, fuel sales to individuals are very poor. The global reason is the war, and if we look more closely – mobilization (those liable for military service are moving less) – EP. Therefore, what we saw with the discounts is a struggle for the customer," said Alexander Sirenko, an analyst at the consulting company "Naftorynok."
"The market is contracting, the active consumption season has ended, and sales are declining. To stimulate consumers, companies are introducing such promotions," added Sergey Kuyun, director of the "Consulting Group A-95."
On the flip side, such behavior from market participants may indicate significant potential for price reductions not just during two-day promotions, but on a permanent basis.
"The fuel market operates with inflated margins; all prices are excessive. The optimal marker is diesel fuel. In Izmail, it costs 39-40 UAH per liter, while at OKKO it is 54-55 UAH per liter. This means a difference of 15 UAH. In any case, a standard margin above 12 UAH is considered excessive here," said Dmitry Leushkin, founder of the Prime group of companies.
According to him, the cost price of pouring (which includes rent, electricity, salaries, taxes – EP) one liter is now about 4 UAH, and another 2 UAH is for logistics.
"Overall costs are about 6 UAH per liter of gasoline and diesel plus discounts for loyal customers at each network – an additional 3 UAH. Thus, with a price difference of 15-16 UAH between border prices and those at the pump, there are at least three extra UAH of profit in the pricing. Accordingly, these 3 UAH are present in all companies," added Leushkin.
Why networks do not lower pump prices but limit themselves to discounts
In Sirenko's opinion, the latest promotional offers from networks demonstrated the potential for price reductions of at least 10% from current levels. "This is significant. It indicates that they have built in excessive markup," he said.
Market expert Gennady Ryabtsev believes that the recent promotional prices could be painlessly established at the pumps. However, it is highly likely that no one will do this.
"We like to conduct one-time promotions instead of forming long-term trends because this obliges no one. Traders understand: if they lower prices and then the market situation changes, forcing them to raise prices again, it will attract the attention of the authorities. It is easier for them to implement temporary discounts," added Ryabtsev.
"Traders are also people who understand everything and count money. So everyone knows it’s better to give customers discounts than rush to lower pump prices since many things can change.
For example, it is unclear whether the president will sign the law on advance payment of the income tax for gas stations.The Verkhovna Rada adopted it, but Zelensky has not signed it yet – the issue is hanging. No one knows who will win the elections in the USA and how the markets will react, what will happen in the conflict between Israel and Iran. In other words, there are many unanswered questions that directly affect the market," said the founder of the Prime group of companies.
According to EP interlocutors in the fuel market, wholesale prices in the European Union are indeed decreasing; however, the situation may change soon.
"First, wholesale batches will become more expensive, including due to the transition to winter fuel. Second, sales volumes are currently declining, and this trend will continue. Lastly, a potential devaluation of the hryvnia closer to the end of the year may play its role," warned Ryabtsev.
Should we return to state price regulation of fuel?
In light of the news about discounts and excessive margins of gas station networks, the question of the advisability of returning to state price regulation of oil products has resurfaced in expert circles.
This mechanism was first introduced in May 2021 and was canceled after the onset of the large war and the unfolding crisis in the sector. The essence of the mechanism was that the Cabinet of Ministers, based on market indicators, calculated the level of maximum markup on fuel and communicated these figures to the gas station networks.
The primary goal of such a step was then named by officials as "supporting healthy and transparent competition in the fuel market and preventing price manipulation," which was meant to protect consumers from overpayments.
Opinions among market participants and experts on this issue are divided. Sirenko believes that price regulation was an effective mechanism and it is now advisable to return to it. "During the war, it is necessary to control prices on critical goods, including fuel. This is an effective measure and it worked well," he said.
In Leushkin's view, such a decision has both pros and cons. "Gas station owners won't like it very much, but from a consumer's perspective, the idea is good. We need to approach this very cautiously because it can create a lot of problems. As long as Shaheds are flying and force majeure situations occur regularly, I wouldn't rush into such a step. Regulating any market is generally not a very good idea, and regulating a force majeure market is twice as bad," said the expert.
He was supported by Kuyun