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Coming months will see big price increases at the pumps

comment ellinas cypriot motorists are about to experience a double whammy in 2024
Cypriot motorists are about to experience a double whammy in 2024
Be warned: Cyprus motorists could be hit with hikes of 25 cents/litre by the end of the year

By Charles Ellinas

With Cyprus finance minister announcing that he will not extend fuel subsidies beyond March 31 and that he will introduce carbon/green taxes by September/October, a question that is being asked is: where are oil and energy prices going?

These are not the only fuel rises Cypriot motorists will see this year. In addition to the taxation hikes, fuel prices will be subject to two more increases: in the price of crude oil and in the petrol/diesel margin over crude.

The price of crude oil

Following Opec+ decision in early March to maintain its production cuts at least to end June, and likely for the rest of 2024, the crude oil price climbed to about $87/barrel and it is expected to rise further. The International Energy Agency now sees the Opec+ production cuts pushing oil markets into deficit in 2024, leading to higher prices.

The Opec+ decision has also led the US Energy Information Administration to increase its forecast prices for crude oil and petroleum products for the remainder of 2024. It now expects Brent crude to rise to $88/barrel. Dutch Bank ING expects similar prices.

Goldman Sachs expects Brent crude to rise to $90/barrel. Standard Chartered forecasts Brent to average $95/barrel in 2024 and rise further next year.

As result, the average price of Brent crude oil is likely to be about 12 per cent higher than the price at the start of the year, $77/barrel.

However, the warning is that stronger global economic growth, now considered to be quite likely as inflation and interest rates come down and manufacturing returns to growth globally, could lead to even higher prices.

Geopolitical tension has also increased. Not only Houthi attacks in the Red Sea continue, but drone attacks by Ukraine have damaged a number of Russian refineries.

The price of diesel/petrol

Russia’s invasion of Ukraine and sanctions imposed by the EU on Russian oil product exports have led to higher prices. In addition, as pressure to reduce carbon emissions mounts, global and European refining capacity has been declining. Analysis by Wood Makenzie estimates that about 21 per cent of 2023 global refining capacity is now at some risk of closure. This is leading to elevated margins for refined oil products such as diesel and gasoline well above the price of crude oil.

Tighter capacity has already pushed up the premium, or the additional price margin that refineries can charge for diesel over benchmark crude oil prices, to a global average of about $30/barrel in 2024, in comparison to about $15/barrel for the period between 2010-2019. The margin for petrol is around $18/barrel, about three times the 2010-2019 average. These are well above long-term averages and are expected to persist for the rest of this decade.

These margins could be driven even higher if Europe suffers further supply shocks. The danger to supplies from sudden geopolitical instability heightened in March as a result of the Ukrainian drone strikes on Russian refineries.

According to Reuters, around 14 per cent of Russia’s 5.5million barrels/day refining capacity has been damaged following drone attacks on 12 refineries since March 12. As a result, Russia banned petrol (gasoline) exports for six months, starting from March 1, to prevent a surge in domestic fuel prices. Some of that production has already been recovered.

Combined with low oil product stocks globally, the loss in Russian refining capacity is impacting oil prices.

Concerned about the impact on US gasoline prices in an election year, the US warned Ukraine against any such operations because of their impact on driving up global oil prices, but also because of the prospect of Russian retaliation. Surely enough, this took place between March 21-25. It was the largest attack against Ukraine’s energy infrastructure ever.

Increased geopolitical tension, global economic growth and Opec+ production cuts conspire to keep crude oil prices high and oil product, diesel and petrol, prices even higher in 2024.

On top of these, Cyprus is about to increase taxation on transport fuels that, combined with the above, will hit Cypriot motorists hard in 2024.

Green taxation

The EU is committed to a 55 per cent reduction in greenhouse gas emissions by 2030 and to become climate-neutral by 2050 and uses taxation on emissions to achieve this.

EU’s Recovery and Resilience Facility (RRF) requires the application of green taxes on energy, transport, pollution and resources.

The EU’s Energy Taxation Directive establishes the minimum excise duty rates that member states must apply to energy products for fuel and transport, such as petrol and diesel.

In addition to that, 15 EU countries apply a carbon tax levied on the carbon content of fossil fuels. The average charge in western Europe is about 7 cents/litre. This will be phased into ETS after 2026.

The EU agreed in 2023 to extend its Emissions Trading System (ETS) to buildings and transport and to start pricing the carbon emissions stemming from using fossil fuels in transport and heating in 2027. Once introduced, this is likely to amount to over 10 cents/litre on the price of petrol. In order to cushion its impact, the EU agreed to a ‘Social Climate Fund’ of €87billion to help the poorer households.

Until now Cyprus has avoided applying a carbon tax to transport fuels, but fulfilling its commitments under the RRF requires its introduction this year.

These taxes are meant to help achieve EU’s environmental policy goals by encouraging a switch to cleaner energy, more sustainable industry and transport and greener habits. They should not be seen as a way for the government to collect money.

In order to ensure social fairness, the European Commission (EC) states that the “effect of green taxation should be most felt by the social actors that consume the most. It should also be matched with support for the most vulnerable and infrastructure investments, such as public transport,” including green infrastructure.

Double whammy

As a result of increased taxation, higher crude oil prices and even higher oil product prices, Cypriot motorists are about to experience a double whammy in 2024.

In comparison to the start of the year, the price of petrol and diesel will increase to reflect the hike in crude and oil product prices, and by about another 15 cents/litre due to higher taxes. The combined effect could be over 25 cents/litre on the price of petrol – and diesel – by the end of 2024 and more thereafter.

This will also impact the already high cost of electricity, since it is produced using diesel/mazut.

Cyprus should heed EC’s advice and use the revenues from these fuel tax increases – not just those from carbon taxes – to support the vulnerable and invest in green projects.

 

Dr Charles Ellinas, @CharlesEllinas, is a senior fellow at the Global Energy Centre of the Atlantic Council

 

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