Diesel is at risk of sinking: what happens to fuel prices?

Yesterday, on February 5, the embargo on refined products from Russia was triggered. The embargo on Russian oil was decided by the European Union as early as 5 December, but this embargo has only now been extended to include refined products, starting with diesel: greater price volatility must be taken into account. But maybe not right away. Let’s try to organize a little.

Is there an apparent increase for petrol and diesel?

Unlike gas, Italy is not particularly exposed to diesel, but the embargo could plausibly lead to a new overall increase in fuel prices, according to analysts. The fear, simply put, is that a new wave of price hikes may begin. It is unknown when. Because the stocks that have accumulated in the last weeks will act as a buffer and possibly prevent a sudden increase in prices. And of course, European companies have moved in time, rushing to replenish their diesel stocks, with flows that peaked last year (the EU also stocks up from the Middle East and Asia, starting with China). But at a certain point, the embargo may pay off: think about the shipping costs, which will certainly increase with the potential impacts on the pumps; Until then, perhaps the mobile excise tax in Prodi’s memory, which was hunted by the Meloni government, would be useful. In short, a general increase in price lists certainly cannot be ruled out.

Not just cars: because diesel is a must

Until yesterday, while waiting for the energy transition, the European Union was importing more than half of its diesel need from Russia, which is the fuel that drives not only 16 million cars but also almost all heavy vehicles, ships and military vehicles in Italy.

The Assoutenti association reported that on some highway sections diesel fuel (in service mode) has already exceeded 2.5 euros per liter, citing Mister Price and Antitrust in a letter to the Ministry of Business, raising the alarm of possible speculative maneuvers. Extra profit for companies in 2022 (1.9 billion from gasoline and 7.4 billion from diesel).

What about diesel and gasoline prices?

It is not easy to make precise predictions so far. Will there really be new significant increases, especially diesel? According to Davide Tabarelli, head of Nomisma Energia, that may happen, but not immediately: “Crude oil, which has been embargoed by European countries since last 5 December, is very likely to follow the diesel dynamics. The market’s price cap in recent months and due to the price cap mechanism implemented by the EU G7 countries is very likely. It needs to be stable,” he said.

The agreement stipulates that countries that do not embargo Russian diesel should not purchase this product from Moscow for more than $100 a barrel: and because it is a seaborne commodity like crude oil and insured in Europe, the Enforcement tool could work as it is crude today. . Tabarelli says Russian diesel is quoted at $80 a barrel, thus below the threshold set by the EU and the G7.

Is it ok? Yes for now. However, there will be a clear realignment of global supply as China presses the accelerator once again, still paying the consequences of its zero Covid policy with GDP growth (2022) returning to the levels of the 70s: “This, combined with the supply flurry that began in the Autumn, will drive diesel prices down.” It will be a factor that can affect it negatively,” he said.

In summary: This embargo has been known for months, so stocks are high today. Also, the mild climate has meant limited heating consumption in Northern Europe and a lot of produce from the United States, meaning that there is no tension for the time being due to low demand from China. However, the market will be particularly stressed for diesel as the scenario changes. European dependence on Russia is historically very strong: replacing flows from Russia with increased imports from the US and the Middle East requires a more expensive journey by pipeline or than Russian product coming from Baltic or Black Sea ports. upside moves could trigger worrying spirals.

double price cap

For this reason, European Union countries prevent the import of Russian refined petroleum products. In parallel, they adopt a price cap mechanism for the sea supply of the same products refined by Russia to third countries. There are two ceilings: the first relates to more refined products such as petroleum, diesel and kerosene, at $100 per barrel. The second ceiling of $45 per barrel relates to fuel oil, naphtha and other less valuable petroleum products.

According to the decisions of Brussels and EU capitals acting in this direction within the framework of the expanded G7 agreements on sanctions against Russia, including Australia and non-G7 EU countries, these measures will further limit Moscow’s revenues and activities. The ability to fuel the war in Ukraine. At the same time, they will help stabilize global energy markets for the benefit of various countries around the world. “We are increasing the pressure by imposing additional price restrictions on Russian refined petroleum products,” European Commission President Ursula von der Leyen commented.
The community manager has also published guidelines for the implementation of these measures.

While the effectiveness of US and EU sanctions against Russia, with its negative repercussions on European economies, is a constant topic of discussion, we continue to see revisions to improve economic forecasts for Russia in parallel. The institution that will act in this direction was the International Monetary Fund. According to the theses of EU technicians, these latest price ceilings on Russian refining products – in fact, like the G7 price ceiling for Russian crude oil of $60, which began on December 5, in line with the ban on imports of crude oil into Russia. With regard to “tolerated” supplies to third countries – by sea – in the EU, it will actually force importers to demand that prices be aligned with these limit levels and limit Moscow’s revenues.

The price ceiling mechanism should be applied by all shipping services in the expanding G7 countries, including shipowners and tanker reinsurance contracts, for the shipment of Russian refined products to third countries.

Mobile excise tax: can it be useful?

In case of an increase in fuel prices in Italy, mobile SCTs will be activated. About what? The re-introduction of this system, which was introduced with the 2008 budget, is ensured by the newly enacted decree on the transparency of fuel prices. The SCT reduction may be accepted if the price “increases compared to the average of the previous two months, relative to the reference value expressed in euros specified in the last economic-financial planning document submitted”. To alleviate the overall burden, the mobile SCT decreases as the price of gasoline and diesel increases.

We need to go back 15 years (2007-2008), when faced with a tripling of the price of oil in 18 months in the context of the global financial crisis, that year’s maneuver revealed that excise taxes could be “lowered”. compensates for higher VAT revenues resulting from changes in the international crude oil price”. The measure simplifies (but above all, its application) the mechanism to sterilize the reverse multiplier effects of increases in the price of industrial fuels in VAT, which insist on a fixed percentage on the sum of the industrial price and excise duty. The tool implemented by the Prodi II government in response to the increase in fuel prices and thus VAT revenues reduces the SCT amount (in equal proportion) to limit the increases. The mechanism has never been implemented in Italy until now.

M5s want excise tax cut restored

“A few weeks ago, we announced a possible further increase on the fuel front, following the start of the EU embargo on refined Russian products from 5 February. Fuel at the pump will suffer both in terms of supply cost and inflation”. This was stated in a memo from Senator Mario Turco, vice president of the M5s.

According to Turco, “The economic policy error of not renewing the excise duty reduction, taking into account the Russian embargo, carries the risk of causing pump prices to reach record levels. Especially as of today, one million barrels a day less than in Russia. This will push various countries to procure oil and diesel from other states such as China and the United States, resulting in higher shipping costs, not to mention possible speculations linked to a supply race.”

“These concerns, voiced by the 5 Star Movement without any comment from the Meloni government, are now becoming reality. Today, the pump price lists on highways show a record quota of 2.5 euros per liter on various routes. Extra profit in fuel oil alone in 2022 is 9.4 billion euros. We need to intervene without wasting any more time by bringing back the excise duty reduction and increasing the ridiculous tax revenues projected in recent years by taxing the extra profits of energy companies. expansion into the arms industry, which has since made record profits,” underlines the M5 base.