The average price of Urals, the most common Russian oil grade, at the end of March was reported to be $77 per barrel, according to the Ministry of Economic Development. This is a significant increase from February's price of $44.59. The good news is that this nearly twofold increase will boost the country’s budget revenues from oil production in April. The downside is that the rising oil prices will also impact Russian refineries, which may affect gasoline prices at the pump. Experts interviewed by "RG" are confident that wholesale fuel prices will rise, although not as sharply as oil prices. They anticipate that retail price increases will be close to the inflation rate. However, this could lead to a decline in the profitability of oil refining and retail fuel sales. It is important to note that the increase in the price of Russian oil does not directly translate to sales to domestic refineries at the $77 per barrel rate. The figure cited by the Ministry of Economic Development is used to calculate taxes for oil companies, which are paid based on all oil produced in the country from the previous month. Payments for March will be made in April. This clarification is significant. At a Urals price of $77, the share of tax payments that companies have to make per barrel is approximately 65-68%. Thus, the mandatory tax portion of the Urals price in April amounted to $50, which is higher than the total price of Urals a month earlier. This is why the main increase in oil prices in the domestic market is expected to occur this month. Reuters, citing trader data, reported that the price of a ton of oil from Western Siberia, supplied to the Russian domestic market, has surged by an average of 32,600 rubles in April compared to March, reaching levels of 59,000 to 60,000 rubles per ton. Thus far, there has been no significant market reaction to this price increase. Gasoline prices for AI-92 and AI-95 are near the highs of this year but are still below the peaks of last autumn. However, given that April has just begun, it is possible that the increase in domestic oil prices has yet to affect market trading. In Russia, the share of oil in the price of a liter of gasoline ranges from 15% to 35%. As oil prices rise, this share grows. Moreover, higher export prices for oil and petroleum products do not directly translate into increased prices for gasoline or diesel in wholesale or retail. This is due to the domestic tax system. Russia employs a mechanism for reverse excise tax on oil supplies intended for domestic refining, which partially compensates refineries for tax payments. This reverse excise scheme includes a damping mechanism, which also acts as partial compensation from the budget to oil companies for supplying fuel to the domestic market at prices lower than export prices. The size of the payments from the damping mechanism is directly proportional to the difference between the export alternative (the price in Europe) and the indicative price (set annually by the government) for the domestic market. The damping can also be negative; when the export price of fuel falls below the indicative prices, oil companies must pay the difference to the budget. This has already occurred in January and February, resulting in losses for oil companies through the damping mechanism amounting to 33.8 billion rubles. However, they can expect to receive approximately 150-200 billion rubles from the budget for March (in April). It is uncertain how much of these payments will offset previous losses and the decline in refining profitability. As noted in a discussion with "RG" by Yuri Stankevich, deputy chairman of the State Duma Committee on Energy, when the price of oil supplied to refineries rises significantly, the plant's margins contract sharply without compensatory mechanisms. To restore margins, refineries are compelled 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 rise more slowly due to the operation of the damping mechanism and an unspoken mandate to stabilize socially sensitive prices. Additionally, the high share of taxes in the price of a liter (60-70%) makes the final price less volatile compared to raw materials. According to Sergey Tereshkin, CEO of Open Oil Market, three-quarters of Russian oil refining is conducted by vertically integrated oil companies (VIOCs), which control the entire supply chain from well to gas station. Companies engaged in oil extraction are unlikely to base their sales prices to refineries on world prices, even with tax control over transfer pricing. Higher procurement costs for raw materials are characteristic of independent refineries; however, these independent refineries account for only a quarter of primary oil processing and an even smaller share of gasoline and diesel production. Therefore, despite rising world prices, it may be excessive to dramatize the situation for Russian oil refining, according to the expert. Dmitry Gusev, deputy chairman of the supervisory board of the Reliable Partner Association and a member of the expert council of the “Russian Gas Station” contest, believes that retail prices will continue to align with inflation, while wholesale prices are likely to rise. Despite export bans and geopolitical challenges, Russia remains part of the global oil and petroleum markets, and these markets continue to exert influence on the domestic market, which in turn reduces the impact of the damping mechanism. The damping mechanism only smoothens but does not nullify external pressure on the market, Stankevich clarifies. In the face of sustained increases in oil prices, it is challenging to fully restrain price rises in wholesale. Additionally, the damping mechanism does not always fully offset increases in raw material prices. Its formula contains coefficients that can cause "under-compensation" during peak times. Previously, assessments indicated that the damping mechanism begins to struggle with compensating oil companies' costs when the price of Russian oil rises above $90 per barrel. However, Urals prices have not yet reached that level. The question remains whether it is possible to detach domestic prices from external influences. Europe is an importer of oil and petroleum products, and the cost of the extracted raw materials and produced fuels domestically is effectively tied to its prices. From the perspective of Sergey Frolov, managing partner at NEFT Research, creating a functional tax system that detaches internal prices from world prices is not feasible under the current tax regime. The tax maneuver—zeroing export duties on oil and petroleum products while increasing mineral extraction taxes (MET)—was a mistake that simplified tax extractions from the industry but effectively placed Russian oil refining on the edge of profitability. Profitability in recent years has largely relied on payments from the damping mechanism, which was initially a temporary measure that functions adequately within a narrow range of external and internal conditions (therefore constantly requiring adjustments). Stankevich believes that in conditions of zero export duties and the current MET formula, complete decoupling of domestic prices from world prices is practically impossible without returning to a more stringent system of government regulation or segmenting the oil market. Currently, it is economically indifferent for extraction companies whether to sell oil for export or for the domestic market; they base their decisions on world prices minus logistics and tariffs. To "decouple" domestic prices, regulators must either introduce administratively set prices for refineries, radically alter the MET to disconnect it from global prices, or implement differentiated taxation for oil supplied to the domestic market. All three options would result in a loss of state revenues or require their redistribution, distorting incentives for extraction, and increasing the risks of shortages or cross-subsidization. Vyacheslav Mishchenko, head of the Center for Analysis of Energy Strategies and Technologies, believes we should focus on establishing our own market and direct pricing mechanisms without reference to international oil price benchmarks. In developing these mechanisms, we must remember that the domestic market is a priority in the current situation. While it is essential to enhance export oil supplies, this should occur only after domestic economic needs are satisfied. A recurring question arises regarding the profitability balance between exports and domestic market deliveries. Traditionally, the industry operated under the principle of "export alternatives," where supplies to domestic refineries should be at least as profitable for oil companies as exports. According to the expert, it may not be entirely correct to utilize administrative measures and government price regulation to create a domestic market. Conditions to develop our price mechanisms—export pricing of Russian oil and domestic market pricing—are required. In this framework, the new tax system should ensure that exports and domestic deliveries are equally profitable for refineries. However, it is crucial to implement this new system correctly and gradually, avoiding excessive reliance on administrative regulatory principles and actively listening to and understanding the market. This approach would protect it from shocks brought on by current global energy crises. Source: RG.RU