Gasoline price rise will be moderate in August

The latest jump in oil prices hit a record-high US $78 per barrel as conflict in the Middle East heated up. Coupled with seasonal peaks in oil product consumption over August–September, the situation has led to a number of pessimistic forecasts for a possible steep rise in prices at the pump in Ukraine. Although gasoline prices will grow in August, they will rise at a moderate rate and will not lead to any crisis, says Borys Bordiuh, an economist at the International Centre for Policy Studies.

Three-quarters of the oil and oil products consumed on the Ukrainian market are imported, mainly from Russia. These days, the price for Russian oil in Ukraine depends primarily on the size of export duty, something the Russian Government revises every two months, based on its monitoring of global prices for Urals crude.

Since the beginning of the year, global oil prices have grown significantly for non-economic reasons. A conflict between Nigerian rebels and Shell over January–February 2006 and tension around the Iranian nuclear program resulted in oil prices peaking at US $75 per barrel. This, in turn, led to a 20% increase in Russian export duty as of 1 August 2006, compared to 1 January 2006. The next oil price hikes in July were in response to the growing conflict between Israel and Hezbollah and will likely lead to a new increase in Russian export duty as of 1 October 2006.

Despite significant rises in the world oil price, the impact on the Ukrainian oil products market will be moderate over August–September 2006. The 8% increase in Russian export duty for oil effective 1 August 2006 will have a direct impact of no more than 3.8% on prices for oil products in Ukraine. Current trends towards rising oil price, should they continue, will not affect the Ukrainian market prior to October, when demand for oil products in Ukraine tends to subside somewhat.

Prices for petroleum products could possibly be affected significantly by other factors that arise from the development of political processes in Ukraine and the expectations of market operators. Another risk to price stability might be attempts of the new Government to change the current model for market operators by revising the regime for importing oil products. The ICPS economist says that, despite these significant risks, August–September rises in oil product prices are likely to be moderate and no more rapid that price rises were in H1’06.