The Gasoline Question: Why Regulated Prices Create Shortages

When will the gasoline question finally be resolved?

Every time before fuel prices go up, we face shortages and wait for that notorious resolution setting price caps on socially significant grades of gasoline. Then the Minister, having cleared it with a heap of agencies and held a couple of dozen meetings, decides: raise prices by 11.3%.

The haggling goes on over every tenge, and in the end a balance is found and the price is set much as it would be at a bazaar, between seller and buyer.

Every year we are told that the capacity of our refineries is not enough to supply the domestic market with gasoline from its own crude, and that a fourth refinery needs to be built.

So far there is not even a word about where the new refinery would be located, let alone when it would be built.

Oil sells at $100 a barrel, and the low cost of transporting it to the main export markets pushes local oil producers to ship their crude abroad. Were it not for export quotas, all of it would leave the country. The main refineries were built back in Soviet times, and in 23 years of independence we have not built a single refinery of our own, even though demand for fuel grows every year with the growth of the population and its prosperity.

Yet we are busy with alternative energy and launching our own satellites.

A fourth refinery could be built with private money, provided it is profitable. But the notorious price caps on fuel, together with world oil prices, keep private investors from deciding to build: the economics do not work.

Kazakhstan presents itself as an oil power, and a myth has taken hold among the public that fuel here should be cheaper than in Europe and other countries. In fact it already is cheaper, but not because we are an oil power. It is because Russia is next door, and Russia has gasoline, while we have none to speak of.

The government understands that by increasing oil refining we cut exports, which would reduce tax revenue to the budget. Still, I am sure nobody has calculated in any depth what the price of the question really is. If an economic model were built that fully calculated the tax effect the country would get from a new refinery, perhaps the decision would be made sooner.

If we want gasoline here to cost what it does in the UAE, then someone must bear the burden of the forgone profit, and in our country only the government can do that.

That means the government must either finance the construction of a new refinery and supply it with cheap crude, or take the other route and force subsoil users to build the fourth refinery. Take the accident at the Kashagan project, which is delaying production. The Kashagan participants could be required to build a new, state-of-the-art refinery. It would serve as a sort of penalty for them, one they would book as an asset, while receiving in addition a 10-year tax exemption, an unlimited quota for foreign labor and a pile of other preferences. A mini-tender could be held among the consortium members, and the construction contract awarded to whoever offers the best value for money.

As things stand, one can even predict when fuel prices will rise yet again, and await the next round of assurances and guarantees that prices will not go up. But how can anyone believe guarantees that have no real backing behind them?

In short, just thinking out loud.