Brace for Higher Gasoline Prices

I wrote about fuel pricing in Kazakhstan some time ago and will not repeat myself. I am simply curious: how much longer will prices be held down while the government pretends that gasoline pricing is free?

The current price of AI-92, the most popular grade of gasoline, is KZT 125, and it is no longer regulated by the state. In theory, fuel prices in Kazakhstan are determined by supply and demand.

But here is what is striking: oil has risen to $50 per barrel, the tenge is holding within a corridor of 330–340 to the dollar, and oil prices no longer have as strong an influence on the exchange rate. This means that higher oil prices on global markets should translate into higher domestic prices in tenge terms. So why is the invisible hand of the market not pushing gasoline prices up? The question is largely rhetorical, but it is a fact that gasoline prices are being held down artificially even though price regulation has formally been abolished. It is a show of stability against a backdrop of rising prices for everything else. Gasoline prices are, after all, one of the most visible indicators of inflation in the country. People look at what they pay at the pump and conclude that all is well, since prices are not rising.

Naturally, such restraint cannot last long. Back in the spring there was already talk of lifting price regulation for AI-80 gasoline and diesel fuel in order to compensate the losses of subsoil users, who sell 30 percent of their oil on the domestic market to meet domestic demand. Because retail chains are not allowed to raise prices, and the costs of refining and transportation are fixed, the entire burden falls on subsoil users, who sell oil inside the country at below-market prices.

In this situation, oil refining is a telling factor, as an indicator of whether domestic oil prices are adequate. We import most of our gasoline, there is always demand for gasoline produced in the country, and the only constraint is the supply of crude to our refineries.

Under these conditions, subsoil users will use every resource available to export as much oil as possible out of the country.

The index of the physical volume of petroleum product output shows that in January–May 2016 it stood at 98.4 percent, 1.6 percent lower than a year earlier. And this is despite the fact that an aromatic hydrocarbons complex has since been commissioned. In other words, the index for gasoline alone is even lower.

So it is clear that there is already not enough oil for the domestic market.

This is the first indicator that domestic prices are not adequate.

July and August are the best time to raise gasoline prices, since the harvest has not yet begun and many people are on vacation. By September it will be a little late. So I think we should expect gasoline prices to rise.

By my modest estimate, for the price of AI-92 to correspond at least roughly to market levels (the global price, minus all taxes, minus all transportation costs and minus discounts, plus the cost of refining, delivery and the current gasoline yield), it should be KZT 145 per liter of AI-92, assuming that prices for AI-80 and diesel fuel continue to be held down as well.

But it seems to me that in this situation the most acceptable decision for the government would be to formally release diesel fuel and AI-80 into free float, letting them rise by about KZT 10–15, and to raise AI-92 by the same amount.