The average price of oil for the most commonly traded Russian grade, Urals, reached $77 per barrel at the end of March, according to the Ministry of Economic Development. In February, the price was $44.59. The positive aspect of this almost twofold increase is the anticipated rise in the country's budget revenues from oil production in April. Conversely, the negative side is that the cost of oil has also risen for Russian oil refineries (ORFs), which could impact gasoline prices at gas stations. Experts surveyed by "RG" are confident that wholesale fuel prices will increase, but not nearly as dramatically as the price of oil itself. Retail price increases are expected to align closely with the inflation rate. However, profitability for oil refining and retail fuel sales is likely to decrease. The reason for this is that the increase in oil prices does not mean that Russian oil companies are selling oil to domestic refineries at $77 per barrel. The price cited by the Ministry of Economic Development is used to calculate taxes for oil companies, which are paid based on oil production from the previous month. Payments for March will be processed in April. This clarification is not accidental. At a Urals price of $77, the percentage of tax payments that companies must make per barrel is around 65-68%. This means that the mandatory tax portion of the price of Urals oil in April is approximately $50, which is higher than the total cost of Urals in the previous month. For this reason, the main increase in oil prices in the domestic market is expected to occur this month. Reuters reported, citing data from traders, that the price of a ton of oil from Western Siberia supplied to the Russian domestic market jumped to an average of 32,600 rubles in April, compared to March, reaching 59,000 to 60,000 rubles per ton. So far, there has been no significant response on exchanges to this increase. The prices for AI-92 and AI-95 gasoline remain near this year's highs but are below last autumn's peaks. However, given that April has only just begun, the impact of rising domestic oil prices may not yet be reflected in trading. In Russia, the share of oil in the price of a liter of gasoline varies between 15% to 35%. As oil prices rise, its share increases. However, the rise in export prices for oil and oil products does not directly translate into similar increases in wholesale and retail gasoline prices. This is how the domestic tax system is structured. Russia has a reverse excise mechanism for oil supplied for domestic refining. This mechanism partially offsets tax payments for refineries. The reverse excise scheme includes a dampening mechanism, which is also a partial budgetary compensation to oil companies for supplying fuel to the domestic market at prices below export levels. The size of these compensations is directly proportional to the difference between the export alternative (price in Europe) and the indicative price (set by the government on an annual basis) for the domestic market. The dampener can also be negative. When the export price of fuel falls below the indicative prices, oil companies must pay the budget the difference that has arisen. This situation occurred in January and February (payment related to February and March). Losses for oil companies due to the dampener during these two months amounted to 33.8 billion rubles. However, in April, they may receive around 150-200 billion rubles from the budget, according to various estimates. The question remains as to whether these payments will cover past costs and the drop in profitability in oil refining. As noted by Yuri Stankevich, Deputy Chairman of the State Duma Energy Committee, if the price of oil supplied to refineries rises significantly, the margin for these facilities shrinks sharply without compensatory mechanisms. To restore margins, refineries strive to raise wholesale prices for gasoline and diesel. Therefore, in the short term, upward pressure on wholesale and small wholesale prices is inevitable. Retail prices tend to lag behind due to the dampening mechanism and the unspoken directive to contain socially sensitive prices. Moreover, the high share of taxes in the price per liter (60-70%) makes the end price less volatile compared to raw materials. According to Sergey Tereshkin, the general director of Open Oil Market, three-quarters of Russian oil refining is handled by vertically integrated oil companies (VIOC) that own the entire fuel production and supply chain—from well to gas station. Oil extraction companies are unlikely to base their raw material sales to subsidiaries that own refineries on world prices, even considering tax control over transfer pricing. Higher raw material procurement costs are typical for independent refineries; however, such refineries account for only a quarter of primary oil processing and even less in gasoline and diesel fuel production. Therefore, despite rising global prices, experts argue that the situation for Russian oil refining should not be overstated. According to Dmitry Gusev, Deputy Chairman of the supervisory board of the "Reliable Partner" association and a member of the expert council for the "Gas Stations of Russia" contest, retail prices will continue to keep pace with inflation, while wholesale prices will indeed rise. Despite export bans and geopolitical considerations, we remain a part of the global oil and oil product market, which continues to influence our market. This very influence reduces the effectiveness of the dampening mechanism. The dampening mechanism merely smooths out, but does not eliminate, external market pressures, Stankevich clarifies. With sustained growth in oil prices, it is challenging to fully contain increases in wholesale prices. Additionally, the dampening mechanism does not always completely offset increases in raw material costs—its formula includes coefficients that can lead to "under-compensation" during peak periods. Indeed, earlier assessments indicated that the dampener struggles to effectively compensate oil companies' costs when the price of Russian oil exceeds $90 per barrel. However, Urals prices have not yet reached that level. The question remains whether it is possible to free the internal price from international price influences. Europe is an importer of oil and oil products, and effectively, the cost of raw materials and fuel produced domestically is tied to its prices. From the perspective of Sergey Frolov, managing partner at NEFT Research, this is impossible within the current tax system. The tax maneuver—abolishing export duties on oil and oil products while increasing the mineral extraction tax (MET)—was an error that simplified tax extractions from the industry while essentially placing Russian oil refining on the brink of profitability. This has primarily been maintained through dampening payments, which were initially a temporary measure functioning adequately within a narrow range of external and internal conditions (thus requiring constant adjustments). Stankevich believes that under a zero export tax and the current MET formula, completely decoupling domestic prices from international prices is practically impossible without reverting to a more stringent government regulation system or segmenting the oil market. Currently, extraction companies find it economically indifferent whether to sell oil for export or for the domestic market—they base decisions on world prices minus logistics and duties. To "decouple" domestic prices, it would be necessary to either implement a regulated (administrative) price for refineries, radically alter the MET to unlink it from world prices, or introduce differentiated taxation for oil heading to the domestic market. All three options would result in lost budget revenues or their redistribution, distortion of production incentives, increased risks of shortages, or cross-subsidization. However, Vyacheslav Mishchenko, head of the Center for Strategic Analysis and Development of the Fuel and Energy Complex, believes that we must focus on creating our own market and direct price-setting mechanisms independent of international oil price benchmarks. In establishing these mechanisms, we should prioritize the internal market over external considerations. While we must develop export supply of oil, this should only follow the satisfaction of domestic economic demands. This frequently raises questions about the relative profitability of exports versus domestic supply. The industry has traditionally operated under the principle of "export alternative," where supplies to domestic refineries should not be less profitable for oil companies than exporting. According to the expert, relying solely on administrative measures and state price regulation to create our own market is not entirely correct. Conditions must be established for the development of independent pricing mechanisms—setting an export quotation for Russian oil and an internal market price. Through this pairing, the new tax system should ensure equal profitability for export and domestic deliveries to refineries. However, this new system must be constructed carefully, step by step, without getting carried away with administrative regulatory principles, while listening to and understanding the market. By doing so, it will be protected from shocks, such as the current global energy crisis. Source: RG.RU