Economist warns against energy market interventionism

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Ljubljana – Retail fuel price regulation makes sense only in the short-run and in exceptional situations. In other cases it is better in the long-run if consumers pay a somewhat higher final price, economist Anže Burger from the Ljubljana Faculty of Social Sciences has told the STA as presented his take on the current energy crisis.

Artificially freezing prices would seriously increase Slovenia’s indebtedness in the long term, keep consumption very high, and threaten the viability of fuel traders.

Burger says an answer to higher prices is more rational consumption by households and businesses, arguing it is clear now that the Russian invasion of Ukraine and the resulting high energy prices will not disappear overnight.

He says the new pricing model, which kicked in on Tuesday, is better than the previous one, which capped fuel prices earlier this year.

The new regime is however not ideal because it still curbs margins, which is in contradiction with freedom of enterprise.

Instead of the government resorting to capping margins, the competition watchdog should examine a potential abuse of dominant position.

“The key role of the state is to ensure competition… Alternatives such as the current interventionism are disastrous for consumers and taxpayers in the long run.”

It would also be better to set fuel prices more often than every two weeks, which would result is smaller price rises, thus preventing the kind of rush to service stations the country witnessed over the past few days with many service stations running out of fuel.

Commenting on the government’s plan to take several more cost-of-living measures, Burger says it makes sense to mitigate the excessive prices for hauliers, farmers and other companies to preserve jobs and international competitiveness.

But he warns about passing all costs onto the national budget, saying “financial markets have been very attentive recently to fiscally vulnerable countries, including Slovenia”.

Burger expects prices to slow down in the coming weeks, saying that oil prices on world markets are already close to $100, down 20% from two weeks ago.

However, this will depend on the war in Ukraine, OPEC’s supply, demand from China, the value of the dollar, the impact of higher interest rates on economic growth, and demand for energy products.

As for the Slovenian petroleum products market, which is dominated by two large retailers, Petrol and OMV Slovenija, Burger says the Competition Protection Agency was “not proactive enough and allowed too much market concentration”.

He thus proposes lowering the barriers to enter the market, especially for smaller fuel retailers, while the two duopolists should be required to sell certain locations to smaller competitors.

Fuel retailers have meanwhile claims to the government for the loss of revenue due to the fuel price freeze imposed in 15 March-30 April and 11 May-20 June.

While the government has turned them down, they insist on the claims as the previous government had indicated they would be reimbursed for the loss of income.

Burger says the claims are justified if a shortfall is proven with higher purchase prices, a loss of margins and a lower regulated price that did not cover the costs.

“However, without precise data on these prices, margins and the impact of a stronger dollar, it is impossible to assess whether the demands are justified.”