The soaring fuel prices are a challenge for every driver. The Competition Council (the CC) regularly receives consumer reports that fuel prices in Latvia are higher compared to other countries and that prices are rising at several retail stations at the same time. Therefore, in 2022, the CC contacted fuel retailers in Latvia and analysed the reasons for the increase in retail fuel prices. Although the CC did not find that the price increases were the result of collusion or cartel agreements between fuel retailers, this market investigation provided important insights into the retail fuel market.
As part of its market monitoring work, the CC collected information on the components and other factors influencing the retail fuel price and grouped them into three broad categories: dues and taxes, the purchase price from wholesalers, and the retailer’s mark-up.
1. Taxes and dues
A little less than half of the fuel price is made up of taxes and dues, which are paid into the state budget. Excise duty, value added tax (VAT) and a compulsory stock obligation duty are imposed on fuel. Compared to other European Union (EU) countries, the excise duty applied in Latvia is on average low, i.e., relatively higher than in Lithuania but lower than in Estonia. Meanwhile, VAT in Latvia is at the EU average. In the opinion of the CC, part of the explanation for the differences in fuel prices between countries is related to the different national approaches to reducing the energy price burden, where e.g., in France, Italy, Belgium and Germany excise duty rates were temporarily reduced or some other form of discount was applied to fuel, which significantly reduced its final price over a certain period. Meanwhile, in Latvia, no such decision was made at the political level to reduce excise duties on fuel.
2. Fuel purchase price
Like taxes and dues, the fuel purchase price makes up a significant part of the final fuel price. When retailers conclude a fuel purchase contract with a wholesaler, the transaction price agreed on in the contract is influenced by a number of factors, including the wholesaler’s mark-up, the exchange prices of petrol and diesel, and the exchange rate of the US dollar against the euro set by Latvijas Banka. According to the CC’s market monitoring, these three factors had the biggest impact on the increase in fuel prices in the first half of 2022.
In addition to these factors, the EU restriction on imports of petroleum products from Russia also had a significant impact on the fuel price, as a result of which wholesalers supplying petroleum products to Latvia had to switch to fuel suppliers operating in the US and Saudi Arabia, which are geographically further away, thus making the final price of fuel more expensive.
3. Retailers’ mark-up
The only costs that retailers impose themselves are fuel mark-ups. The mark-up can change several times a day and varies from one petrol station to another. This component represents on average 7–8% of the fuel price, however, according to the CC’s observations, sometimes the mark-up tends to fluctuate significantly, e.g., in early 2022, when the global political and economic system was highly unstable due to the Russian attack and pandemic, the retailers’ mark-up on fuel fluctuated between -3% and +27%. The main reason explaining such fluctuations in the mark-up is linked to the stock exchange fuel price. As explained above, the exchange fuel price has a direct impact on the retail fuel price. If the exchange price tends to increase, retailers assume that the next fuel purchase price will increase, thus motivating the fuel retailer to raise the average retail fuel price. Fuel retailers monitor the daily changes in the exchange fuel price and if there is a significant change in the exchange fuel price, the retail fuel price is changed accordingly on the same day.
Meanwhile, the significant fluctuation of the mark-up from negative to +27% is due to the adjustment of fuel prices by the petrol stations and their attempts to balance them. In a period of rising prices, consumers are actively looking for cheaper alternatives, so retailers are motivated to keep fuel prices down, even if this means selling at a loss. Therefore, when fuel prices are high, petrol stations tend to sell at cost or at a negative mark-up, but the petrol station recovers these losses in the future by increasing the mark-up when fuel prices fall.
There are also various other factors that influence the fuel price. One of these is, for example, the location of the petrol station – the further the petrol station is from the point of receipt, the higher the logistics costs, which are reflected in the retail fuel price. The type of customers served and the overall demand for fuel also depend on the location of the petrol station. In residential areas, fuel is mainly purchased by private drivers, who are more likely to receive a lower discount than companies, and therefore the retail fuel price will be lower in petrol stations located in residential areas. On the other hand, in industrial areas such as near ports, on highways outside cities, the retail fuel price is higher, as it is mainly used and paid for by companies under contractual terms. It should also be noted that the retail fuel price is also affected by consumer demand: locations with higher demand for fuel, such as petrol stations located on busy roads, will also have a higher retail fuel price than locations with lower demand for fuel.
Why do prices differ between petrol stations in Latvia and other countries?
Fuel distribution takes place in several stages, where each stage of the supply chain may have different reasons for making fuel prices more expensive. As fuel sales are not centralised, fuel suppliers and refiners may differ and thus their terms and prices may also differ. Fuel prices can be affected by national taxes and dues, as well as by exceptional measures such as discounts or tax incentives that are used to temporarily reduce fuel prices. Fuel prices depend on the delivery contract in which the exchange rate at the time of purchase plays a significant role, as well as the exchange fuel price and the wholesaler’s mark-up.
Given that the final price does not specify which of the price factors influenced the final price, the CC considers that comparisons between fuel prices and price trends in different countries should be critically made and it should be taken into account that there are significant differences between countries in product quality, tax systems, trading practices and market structures in the retail fuel sector.