While excise rise in pipeline threatens to add 23.5 cents to litre of retail fuel in five years, considerable extra price rise looms by potential rise in oil prices and strengthening of the dollar.
Strong dollar joins excise rise to make fuel dearer
According to calculations by Postimees, the 10 percent excise rise planned by new government over next four years would, in five years, add 23.5 cents to current retail price of a litre of petrol.
Swedbank chief economist Tõnu Mertsina puts us in remembrance that Estonia’s petrol and diesel excise is above EU minimal rate.
«At the moment, our petrol excise is among the lowest in European Union, lover also than in Latvia and Lithuania. Our diesel excise is comparatively low as well,» he said. «Should petrol excise rise 10 percent, say, and 14 percent for diesel, regarding petrol we would remain among the lowest in EU, but with diesel we would rise to among the highest.»
Alas, excise and the added VAT aren’t the only factors affecting car fuel prices. Though taxes amount to a bit over half of fuel retail prices, close to a half comes from wholesale prices. For North-West Europe, wholesale prices for all oil products i.e. petrol, diesel fuel, fuel oils etc are shaped at Rotterdam Port, and the prices are in dollars per tonne.
Thus, motor fuel prices are also affected by rate of euro regarding dollar. At the moment, we are in a situation where the oil price drop has partly been nullified by the strengthening of the dollar. Had the dollar rate remained where it was half a year ago, we’d be paying a bit over a euro for a litre of gas at the filling stations.
«To the possible rise in crude prices on global markets in second half of the year, add the impact of the strong dollar. It’s just a matter of time till dollar reaches parity with euro and even a bit further than that which, considering the weak wage and price pressure in the US, will still probably not be happening during this year,» said Nordea Estonia chief economist Tõnu Palm.
«With exchange rates there is huge uncertainly, because the resurgence of Greek problems alone has the potential to weaken the euro through significant support levels,» he added.
Though for the most part of its history rate of the euro has stayed above parity level i.e. euro being stronger than the dollar, this has not always been the case. The weakest that euro has ever been was €0.82 a dollar. Some economists predict the European single currency may fall to €0.80 a dollar.
With the euro weakening to that degree, 17.8 cents would be added to a litre of petrol. Thus: if, on top of excise rise we would also be hit by a record-weak euro in 2019, even with crude oil remaining at current levels a litre of petrol would cost us 41 cents more.
At the beginning of the year, oil fell to its five year cheapest and remains near the level till today. At the moment, it is difficult to say if it has bottomed out. According to some analysts, oil may drop to $40 a barrel.
Areas most impacted
According to Mr Palm, an important milestone will be June meeting of OPEC oil ministers to discuss the new situation on the market. As we remember, it was the cartel’s meeting in November that sent oil price freefalling.
According to Mr Mertsina, fuel price has the heaviest impact on transport sector which uses up almost half of imported fuel, and on households consuming approximately a fifth.
«Car fuel makes for six percent of Estonian private consumption, and about 80 percent of households have a car,» said Mr Palm. «Lots of fuel is also consumed in construction, agriculture and in wholesale and retail – in each about five percent of imported fuel. These are the sectors most affected by fuel price change, excise rise included,» he added.
CEO of Kaupmees & Ko, a wholesaler
Fuel excise rise affects prices from various angles. Firstly, direct costs to get the goods to the customer. After a while, this service will get more expensive. Suppliers are bringing the goods to us and these will be more expensive i.e. already in the warehouse the goods are more expensive. The same with commodities – these are dearer also. It affects all areas of life. We all come in contact with transport.
This is lifting money from one pocket to another, which in itself is not right. I cannot lift wages five percent and, in order to do that, add five percent to the price of products. This cannot be. I will need to think how to make production more effective so the employees would be able to earn such salary.
CEO of Sebe, a bus company
Obviously, excise rise will not make anything cheaper. On inter-urban lines, costs are covered by income from tickets. As the costs go up, whether it be because of fuel price rise, excise or wage rise, tickets will have to cost more. With city-to-city bus-rides, fuel makes for about a third of costs. It’s difficult to predict how the price will change.
Regarding city and county lines, public procurement contracts feature a price index for fuel price. It is up to county government to decide if the subsidies will increase or ticket prices go up. On county lines, where the buses are smaller, fuel is a fourth or fifth of the costs.