Analysts fear that rising oil prices may cause inflation.
A recent global surge in oil prices has squeezed the pockets of consumers and raised inflationary concerns throughout the world. Ukraine, whose petroleum sector has in recent years transformed from a highly regulated state-controlled industry into a largely private-owned and liberalized market, has been no exception.
Oil prices have in recent weeks risen to 13-year highs, exceeding $40 dollars per barrel in New York, the result of a combination of booming demand and uncertainty about supplies from Middle East producers.
Oil prices have risen by more than 20 percent globally, but in Ukraine, gasoline prices have risen even more aggressively.
The temporary closure of the Lysychank Oil Refinery, one of Ukraine’s largest, and an upcoming increase in Russian oil export tariffs, helped drive prices for petroleum products in Ukraine even higher, analysts say.
“Prices have increased by more than 40 percent,” said Serhy Kuyun, acting director of Kyiv’s United Petroleum Consultants (UPECO), formerly known as Ukrainian Petroleum and Energy Consultants.
“95-octane gasoline that was selling for Hr 2.25 in the beginning of May is selling for about Hr 3.30.”
Prices for other sorts of high octane gasoline such as 92 and diesel fuels have increased by a similar amount since early May.
Kuyun attributed the domestic rise in fuel costs mostly to the rise in world oil prices.”If the United States is thinking of opening its reserves, than we know that the situation is serious,” he said. However, he added that other factors are also pushing prices up in Ukraine.
“The export tariff on Russian crude will increase to $41 [per ton] starting June, from the current rate of $35,” Kuyun said, adding that fuel prices in Russia have increased by only 15 percent since early May, less than in Ukraine and Europe. 95-octane gasoline in Moscow currently sells at the equivalent of Hr 2.16 per liter, significantly less than Hr 3.30 prices seen in Kyiv.
The sharp increase in gasoline prices has prompted Ukraine’s Anti-Monopoly Committee to issue a statement explaining that rising world oil prices, not internal factors, are the cause of the price surge on the local market.
“The main cause of the price jump is a record 40 percent increase in world oil prices,” reads the May 25 statement, which oversees competition on the largely Russian-controlled Ukrainian petroleum market.
“This global tendency has spurred unfavorable internal conditions, encouraging an increase in oil exports. The price of gasoline is also being influenced negatively by export tariffs on Russian oil,” the statement reads.
Inflationary fears
The sharp rise in gasoline costs has prompted fears of inflation.
“I think there is a real risk of inflation as fuel is used to produce nearly all goods,” said Volodymyr Sidenko, an economist at the Razumkov Center for Economic and Political Studies.
“We can expect an increase in prices for all goods and services within the next couple of months in the range of 10 percent or more. The general level of inflation could reach 15 percent [almost double previous expectation of around six percent] if [Ukraine or oil producers] don’t find a way to ease this problem,” Sidenko added.
Some taxi companies have already raised their rates to compensate for more expensive fuel.
“Some taxi companies raised tariffs from about 59 kopeks per kilometer to about Hr 1.50 per kilometer, but we haven’t yet raised our tariffs, which have remained Hr 1.20 per kilometer,” said a source at Kyiv-Taxi, a Kyiv-based taxi company. “Our tariff is high enough to compensate on the increased cost of fuel. We think it is too early to raise tariffs.”
Sidenko said taxi companies would be among the first to raise costs, but costs for most goods would follow later, as higher transport costs feed through to consumers.
Industries highly dependent on fuel, such as steel and chemicals, which account for a majority of Ukraine’s most profitable exports, would also be seriously affected.
“I think this problem is serious and could slow economic growth rate in Ukraine. We have in recent years had one of the fastest growing economies in Europe and this could change that trend,” Sidenko said.
There is a lot of uncertainty, as it is not clear how world oil prices will change in the near future, he added.
Government response
On May 25, Prime Minister Viktor Yanukovych told journalists the government would place limitations on exports of oil products in order to bring down domestic prices.
Sidenko said that a move of this sort could keep prices down and voters happy ahead of an upcoming presidential election, in which Yanukovych is a candidate. However, protectionist policies could worsen Ukraine’s negotiations for membership of the World Trade Organization and lead to new trade restrictions on the country’s exports.
Also on May 25, Deputy Prime Minister Andry Kluyev told journalists the government had reached an agreement with oil companies in the country, who agreed to reduce prices for a month, in the hope of staving off negative economic consequences. The companies included TNK-Ukraine, Lukoil-Ukraine, Ukrtatnafta and Ukrnafta.
Interfax-Ukraine cited Kluyev as describing the fuel price hikes as “pure speculation and an artificially created rush.” He added that the Lysychansk refinery, controlled by TNK-Ukraine, would resume operations on May 31, causing a drop in prices.
The rapid increase in prices also reflects changes in the structure of the country’s oil market.
Ukraine has in recent years privatized several large oil refineries, yielding control to Russian oil companies and subjecting the country to fluctuations in the world oil price.
Kuyun said Ukraine today is highly dependent on world oil market prices, given that it produces only 15 percent of its oil. Most of the country’s needs are met with oil imported from Russia.
“Ukraine is buying oil [at prices] similar to world prices,” he said. “We have never experienced such sharp market effects. Previously, when Ukraine’s oil sector was state owned, it was tightly controlled by the government and operated relatively independent of market forces. Today the sector is by-and-large governed by market economics… As a result, Ukraine suddenly felt the affect of changes in the market.”
“Its hard to predict what will happen to prices in the near future. Much depends on world oil prices,” he added.
On May 26, prices for gasoline in Ukraine continued to rise. In Dnipropetrovsk, for example, 95-octane gasoline increased overnight on average by 17 percent to Hr 5.50 per liter.
