High gas prices contrary to lowered demand for crude

Gasoline prices in the Czech Republic are at all-time highs, but with global oil supplies still outstripping demand, few experts seem to have a coherent explanation as to why.

While market pundits alternately cite fears over conflict with Iran, fluctuating currency rates and general economic unease as possible reasons, all fail to explain why global gasoline prices are rising at a rate much higher than prices for the crude oil from which gasoline is made.

Brent North Sea crude traded at $110.63 per barrel in London Jan. 23 - up slightly as the European Union formally approved sanctions against Iran. While surpassing the once-foreboding $100 per barrel mark, oil traded at $147 per barrel in July 2008. The cost of oil is lower than in July 2008, 20-day price averages on Brent crude are nearly exactly what they were last November, and yet the cost of filling up at the service station is much higher.

Prices for Natural 95 gasoline hovered at a nationwide average of about 36 Kč per liter as of press time. Diesel fuel was nearer to 37 Kč per liter - both record highs. By way of explanation for increased prices in Europe, many analysts point to the decline of the euro on global currency markets. Indeed, the rise of the U.S. dollar relative to the euro - and the Czech crown - is a factor in European rates generally, as oil is priced in dollars.

"The Czech crown is quite weak, and I am sure the crown can be even weaker than it is now," said Vladimír Pikora, chief economist for Next Finance in Prague.

But even that can only be a partial explanation as petrol prices in the United States this month are the highest they have ever been in the month of January, and this despite a report from the monitoring group Platts that says overall U.S. gasoline consumption remains below 2003 levels.

Elsewhere, fuel consumption is also down. In the United Kingdom, 2.4 billion liters less fuel was consumed in the first three quarters of 2011 than during the same period in 2008, according to government statistics.

Figures released by the International Energy Agency (IEA) show demand for oil slowing, with worldwide consumption declining some 300,000 barrels per day during the fourth quarter of 2011. In the IEA's most recent report, the outlook in growth of oil consumption was cut from 1.3 million barrels per day to 1.1 million barrels a day this year, a trend that falls in line with many European countries rolling back economic growth forecasts for this year.

The irrational behavior of the gasoline markets is prompting policymakers to scramble for a response, although their options remain few and far between.

 "Should the price approach 40 Kč [per liter], then indisputably a debate at the governmental level must be opened on how we can solve the problem," Transport Minister Pavel Dobeš (Public Affairs, VV) said, speaking on Czech Television Jan. 22. "At this moment, there are just two options: the value-added tax and excise rates."

Martin Špryňar, secretary general of the Association of Road Transport Operators, said his group supports lowering VAT and excise taxes on gasoline. He cited high fuel prices and increased tolls on highways as a "deadly cocktail" for commercial transporters that will have knock-on effects on the economy at large.

"Lowering VAT can surely help in the short term," he said. "However, a systematic solution is a proper modification of the excise tax, which is at this moment one of the highest in the EU."

The excise tax on unleaded gasoline is 10.895 Kč per liter - nearly one-third the cost of each liter. That number could come down as low as 9.097 Kč and still be within EU requirements, but it would save drivers less than 2 Kč per liter.

"This is not a solution," Pikora said. "The excise rates are too high, but any change needs to come as part of larger changes to taxes, not as a reaction to fuel prices."

Furthermore, the government looks poised to raise, not lower, VAT rates as it seeks to make up for budget shortfalls with lower-than-expected GDP in 2012. At present, fuel has a 17.5 percent VAT rate, a number that could grow to 19 percent or 20 percent by the middle of the year. Any reduction in the VAT rate on gasoline would likely dilute the effectiveness of using VAT to combat budget shortfalls, and it would seem unlikely the government could pursue both policies at once. Finance Minister Miroslav Kalousek has said a cut to the VAT on gasoline is unlikely.

There remains at least one more possible explanation for high domestic gasoline prices, with the role of refineries - the middlemen between crude oil and gasoline - called into question.  

This issue surfaced in the United States in May 2011, as a group of Democrats in the U.S. Senate asked the Federal Trade Commission to investigate oil-refining operations. They cited Energy Department statistics that found U.S. refineries were only operating at 82 percent of capacity - the lowest rate for that time of year since 1985 - even as gasoline companies had achieved record quarterly profits.

In the Czech Republic, Unipetrol is the largest refiner of gasoline, owning all of or a majority stake in three major refineries. Through the first three quarters of 2011, those refineries were running at 74 percent capacity, according to a company spokesman, a rate considerably lower than that which angered U.S. lawmakers.

However, while the company did post profits of 334.8 million Kč through Q3 2011, this was down significantly from nearly 1 billion Kč over the same period the year before. Lowered operating capacity does affect supply and prices, but declining profits runs counter to the idea that the refineries are egregiously limiting supply to their own benefit.   

Unipetrol's Paramo Pardubice refinery is closed through March, further choking supplies, and, when combined with a weak crown, this contributes to rising domestic gasoline prices but still does little to explain rising prices worldwide, which likely has the strongest effect on prices in the Czech Republic.  

"There is not any huge demand for oil now, so the only real reason for the rise is speculation and fear," Pikora said.

- Filip Šenk contributed to this report.

Benjamin Cunningham can be reached at
bcunningham@praguepost.com