Irakli Gharibashvili: “We are actively working on price regulation – fuel prices have decreased considerably.”
Verdict: FactCheck concludes that Irakli Gharibashvili’s statement is HALF TRUE.
Resume: Fuel prices in Georgia have indeed decreased over the course of the last year, although the same situation has occurred almost everywhere in the world albeit at different magnitudes.
Georgia is 100% import-dependent in terms of fuel, its consumption is miniscule when looked at from a global perspective and it has no influence whatsoever over worldwide price formation. If the government does not change the tax burden for importers, it will also be unable to affect retail prices on fuel (except for the imposition of a margin of profit, subsidising or pressuring business by the authorities). Therefore, it is not a government’s fault when petroleum prices go up when oil prices rise on the world market and governments should not be taking credit when fuel gets cheaper owing to the global reduction of oil prices.
The excise tax rate on fuel in Georgia has not decreased and the profit margin threshold has not been imposed. In general, the government has not made any changes in the regulatory framework in this regard. Therefore, linking fuel price reduction to the government’s actions aimed at “regulating prices” is absurd.
At the same time, prices in retail networks have decreased more in one year as compared to most of the European countries. The government’s other political decision, namely its position vis-à-vis Russia that made Georgia an attractive destination for Russian money inflows and allowed for the consumption of the Russian oil, is indeed partly a reason behind this. In particular, in 2022 remittances from Russia increased fivefold which contributed to GEL appreciation vis-à-vis USD and led to the reduction of fuel’s GEL-denominated value. In addition, the share of cheap Russian oil increased from 16% to 75% in the first quarter of 2023 as compared to the same period of the previous year. Paying less for fuel purchases provided additional opportunities for importers to reduce prices.
Therefore, FactCheck concludes that Irakli Gharibashvili’s statement is HALF TRUE.
Analysis:
On 18 April 2023, at a session of the Government of Georgia, Prime Minister Irakli Gharibashvili stated when speaking about consumer prices (from 3:27): “We are actively working on price regulation and cutting prices – fuel prices have decreased considerably.”
Fuel prices, similar to the prices of any other product, are determined by supply and demand. Since demand on fuel is less rigid, higher prices on fuel do not reduce consumption or reduce the price only marginally. The volume of supplies is determined by oil-producing countries which make relevant decisions in view of demand and the demand itself rests on economic activity and technological development. In both cases, political factors can be identified as additional factors.
In April 2020 when half of the global population was living under a strict lockdown, the price of one barrel of BRENT crude oil fell under USD 20 in light of the drastic drop in demand on oil whilst WTI for some time was in a minus and broke a price drop record (- USD 37). OPEC+ member states agreed on a 10% cut on production but oil prices were still kept under USD 50 by the end of 2020.
In 2021, restrictions were gradually lifted and oil extraction was also rising, albeit at a relatively low pace which caused an upward price hike. In February 2022, prior to Russia’s invasion of Ukraine, the price of one barrel already exceeded USD 80. After the outbreak of war, the price exceeded USD 130 in March 2022 for the first time since 2008, although it decreased later and fell under USD 100 threshold.
Diesel and petrol retail prices are determined by Platts but the price of petrol depends on the price of crude oil. Under a free market, prices sometimes increase at gas stations when oil prices get higher on the world market. The same thing happens when prices go down.
Governments usually do not interfere in price formation in a free market but sometimes a free market becomes unfree. There are two ways to reduce prices using legal methods – direct subsidies and tax benefits. The Government of Georgia, unlike its approach vis-à-vis bread, electricity and natural gas, did not resort to such methods in the case of fuel. In July, Diesel’s price exceeded GEL 4.8 and the price of premium fuel was above GEL 4 with the cheapest regular-type petrol price at GEL 3.7.
In incidences of price growth, the authorities were always referring to external factors being the reason and this was correct. Local extraction in Georgia is less than 5% of the total demand and export is entirely in a crude form because of the lack of oil-processing plants in the country. However, if increasing fuel prices are not the government’s fault, then the reduction of prices should also not be something for which the government takes credit except for those case when the tax burden for the importer/seller is reduced. Such a situation has not yet happened in Georgia. The amount of excise tax for one tonne of diesel (1,300 litres) is GEL 400 and GEL 500 for petrol. VAT is 18% as it is with other businesses. Income and profit tax rates have also remained intact.
As compared to March-April and most, particularly, the period of July-August 2022, retail fuel prices have indeed decreased in Georgia, although they have decreased worldwide.
According to the information of the National Statistics Office of Georgia, diesel and petrol prices decreased by 9% and 33% on average, respectively, in March 2023 as compared to the same period of the previous year. Consolidated data for April will become available on 3 May 2023. In addition, the price archive is accessible on the websites of some of the well-recognised fuel stations. On 17 April 2023, diesel’s price decreased by 22%-25%, the price for regular type fuel dropped by 39%, the price for premium petroleum fell by 34%, the price for super fuel by 17%, although the price for natural gas increased by 6.3%.
In March 2023, the price for diesel fuel in Armenia decreased by 26.9% and the price for petroleum dropped by 2.8%. Of Georgia’s neighbour countries, Russia and Azerbaijan are themselves oil-producers and, therefore, these two countries cannot be good examples for comparison. Turkey’s example can also not be used owing to its over 60% inflation rate which jumped to over 80% in October 2022.
Fuel prices decreased comparably slighter by 3-5% in Latvia. The price in Ireland came back to what it was in 2021 with a total decreased of 9%.
The price of natural gas increased more in Europe and then showed a significant decrease. Georgia survived these turbulences owing to its agreements with Azerbaijan.
All things being equal, the prices of raw materials produced in different countries are similar because of the price difference for homogenous products (oil, gold, copper…) will exceed transportation costs and even neighbour countries will refrain from buying them. Prior to the invasion of Ukraine, the price of Russian Ural oil was equal to the BRENT price. The war, of course, has now changed everything. The reduction in the demand for Russian oil decreased its price. Prices of Russia-produced petrol and diesel also followed suit.
Georgia did not officially join the sanctions against Russia, although it did take the commitment that it would not breach them. Russian oil was only partially hit by the sanctions. In particular, the EU banned its import by tankers as well as putting a price cap of USD 60 per barrel. Georgia is not an EU member state. The observance of the sanctions means that a banned product, hypothetically a vehicle produced in the EU with a value of over EUR 50,000, should not end up in Russia through Georgia. The same approach is not applied to import from Russia.
In the first quarter of 2022, Georgia purchased petroleum products from Russia at a value of USD 45 million. In the same period of 2023, this amount was 276% more at USD 169 million. In terms of the growth of volume, it is 335% from 54,000 tonnes to 235,000 tonnes.
Measured in monetary value, Russia’s share in petroleum products increased from 18.4% to 67% and rose from 15.6% to 74.6% in terms of volume (in the first quarter of 2022, 54,000 tonnes of the 288,000 tonnes of petroleum products were from Russia. In the same period of 2023, Russian oil accounted for 235,000 tonnes of the total of 315,000 tonnes). In the first quarter of 2022, the average price for one tonne of Russian petroleum products was USD 833 and decreased to USD 719 in the first quarter of 2023. One of the reasons why fuel retail prices in Georgia dropped at a higher rate as compared to other countries was because Georgian oil importers were using Russia as a supplier of cheap fuel.
Ultimately, if we only take a look at the numbers, fuel price in Georgia has indeed decreased but this has happened because of a drop in oil prices on the world market (as compared to peak prices) and a swelling of the share of Russia’s cheap oil by nearly fivefold to 75%. There is also another reason – the appreciation of GEL which in turn is partially linked with increased currency inflows from Russia intended for Russian nationals. The petrol and diesel retail price hike in 2022 was not the Government of Georgia’s fault and, similarly, claiming that price reduction was something for which the government deserves credit as claimed by the Prime Minister is not be appropriate. The only truth is that Georgian importers had the opportunity to access cheap Russian oil as a result of the government’s position not to join the restrictive measures imposed against Russia. This is what cut retail prices Given all of these circumstances, FactCheck concludes that Irakli Gharibashvili’s statement is HALF TRUE.
