Hungarian fuel prices: no one is right when looked at from all sides
KSH says Hungarian petrol is expensive
As Portfolio reported, the Hungarian Central Statistical Office published its statistics on Friday to compare fuel prices in the region, and the figures show that
domestic petrol and diesel prices are above the regional average.
According to the EU Weekly Oil Bulletin, the average price of 95-octane petrol in Hungary was HUF 640, compared to HUF 620 in the regional countries, which is 3.2% higher than the regional average. The weekly average price of diesel fuel in Hungary was HUF 654, up HUF 31, or 5%, on the regional average of HUF 623.
Commenting on the new data, Minister of National Economy Márton Nagy reminded that this statistic will form the basis for possible government intervention in the fuel market: the government will meet this week to examine the issue and consider whether it is necessary to intervene in order to strengthen the agreement with fuel market players - the agreement is that domestic fuel prices should be in the regional mid-range.
"Next week we will find out what the government will do, I ask for your patience until Wednesday or Thursday," the minister said on Friday, adding that
the reintroduction of the fuel price freeze is not ruled out.
Is the methodology right?
If the methodology of the Hungarian Central Statistical Office is to be trusted, the data as of 15 April show that petrol was the fourth most expensive fuel in the region, with Bulgaria, for example, costing more than HUF 100 less per litre. And for diesel, the KSH showed that Hungary was in the top league, with Bulgarian prices also more than HUF 100 lower than in Hungary.
Portfoio's average values differ from the KSH averages because we have included Hungarian fuels in the regional average. By the way, the data source is mid-April because the European Commission's website updates the data every Thursday with the average fuel prices on Monday of that week, so we will be able to provide the latest figures on Thursday 25th.
The above bar charts were a kind of introduction to this chapter, which may as well have been called "Find the error". Two energy market experts have pointed out flaws in the methodology of the KSH, which significantly distort the situation and do not necessarily lead the government to the right conclusions.
The most striking distortion is the range of countries considered to be regional. Ottó Grád, secretary general of the Hungarian Petroleum Association, which represents coloured pumps, pointed out in response to a question from Portfolio that
the inclusion of Bulgaria, which is significantly down on the prices of other countries, is difficult to understand,
but it is not viable for Hungarian motorists to travel hundreds of kilometres to Poland and the Czech Republic to get cheaper fuel prices. The expert said that in a regional comparison, it would only be worth taking into account the prices in the bordering countries, and with the Czech, Polish and Bulgarian prices eliminated, the average regional price would be much higher, at only HUF 4 for petrol (+0.6% compared to the Hungarian price) and HUF 1 for diesel (0.2%).
Are taxes really high?
The less spectacular problem with the data source - and not even mentioned in the KSH material - is the tax content. Along with Ottó Grád, Tamás Pletser, energy expert at Erste, pointed out that the Commission's data on which the statistics are based rely on the tax content reported by individual countries, while the domestic body only includes the three major tax rates, VAT, excise duty and stockholding tax, in the burden.
However, it does not include the Energy Efficiency Obligation Scheme (EKR) fee and the retail sales tax, which are paid only by Hungarian fuel retailers and represent a total increase of HUF 27 in the retail price of petrol at current prices.
But the really interesting thing about the tax rates is that the tax rate adjusted for the EKR fee and the retail tax is
not too high compared to the surrounding countries,
with the 49.1% tax rate calculated from the Hungarian Petroleum Association (MÁSZ) data source almost exactly the same as the regional average. The domestic situation is slightly less favourable for diesel, where the tax rate for Hungarian fuel is 47.2%, compared to the average of 45.2%.
What else could be causing "high" petrol prices?
The overall conclusion on the regional situation of domestic fuel prices is that there is
nothing to see here.
The average price of a litre of petrol in Hungary's neighbouring countries is quite similar (regional average of HUF 636 vs HUF 640 in Hungary), but fuel market players are not necessarily right to point the finger at the high tax content, as the tax burden of the domestic sector is close to the average too even after taking into account the retail sales tax and the EKR obligation.
In addition to the tax rate, another very important factor in the regional comparison is the performance of currencies, specifically against the dollar, because crude oil is purchased in dollars. In this respect, the last few months have not been favourable, to put it mildly:
so far this year, the forint has weakened by 6.8% against the dollar, while the average depreciation of the currencies of the neighbouring countries has been only 3.5%.
Portfolio does not have official data on the profit margins of domestic oil market players and it would be difficult to compare the procurement cost structures of the countries on a percentage basis, but other information, especially the weak forint, suggests that
domestic players are operating with lower margins than the regional average,
whether it is the premium for procurement and refining (wholesale margins) or the profit of the pumps, i.e. the retail margins. With this in mind, a new fuel price freeze by the government does not seem justified.
What price freeze could come?
However, a decision on such a measure could be taken this week, so it may be worth thinking about what another price freeze could look like. Exactly what we can expect is, of course, impossible to know in advance, but the past can give us some clues.
This measure was first introduced in Hungary in November 2021, when the price of regular petrol and diesel was capped at HUF 480. It is important to note that, unlike the Croatian example (at that time only Croatia applied a similar measure in the EU), the price of fuel was not set at the current price level, but much lower: the decision led to a HUF 26 reduction in the price of 95-octane petrol, while the price of diesel was reduced by HUF 32.
If we add to this the fact that, despite the government directive issued several months ago, the price of domestic fuel is still not in the regional mid-range, it is very likely that the price of petrol and diesel will not be frozen at the current market price, but will be based on a lower price level. This could be modelled on the previous solution, i.e. set to a price rate seen a few weeks ago. However, as the government's communication so far has focused on the regional average price, it is also possible that there will be
a dynamic price freeze, i.e. domestic fuel prices will be fixed at the regional average price level calculated by the KSH.
In this case, the price of petrol could change on a weekly basis, depending on the average price calculated by the latest methodology of the KSH. If the latter solution were to be implemented, it would reduce the price of domestic petrol and diesel by HUF 20 and HUF 31 respectively, based on current figures, which is roughly the same as the reduction that took effect with the first price freeze. In this case, fuel tourism would presumably be avoided and, in addition, although this method would significantly narrow the margins, it would at least provide a degree of flexibility, as price levels would react to changes in world market prices and would therefore be more predictable than a fixed price freeze.
What was wrong with the price freeze?
For many, the price freeze measure introduced in November 2021 and its impact on the market will be a painful memory - as we all know, the measure did not change the tax content of fuel, the dealer margin decreased and dealers were not compensated.
They were also unable to touch excise duty because the European Union sets the minimum excise duty on petrol at 36 euro cents, and because the forint weakened significantly against the euro in the months preceding the measure, the domestic rate fell below this minimum.
This is why both Mol and MÁSZ stressed the importance of the stability of the domestic fuel market following a government briefing last September, while the secretary general of MÁSZ also said that
if the government reintroduced official prices, serious shortages would emerge in a very short time.
But what exactly was wrong with the measure? Here's a recap.
From the outset, the fuel price freeze proved difficult to maintain and highly distortive of market conditions, so the government revised the measure several times in the months before its introduction, successively excluding a growing proportion of consumers from the price freeze. The government imposed the official price of HUF 480 at the end of 2021 with temporary effect, and then repeatedly extended the measure to the last day of 2022. The following problems and difficulties were encountered in 2023 before the price cap was phased out:
- In early March 2022, the voices of the Hungarian Road Haulage Association were getting louder and louder, pointing to disruptions in the supply chain. The government responded to this at a press briefing, outlining the response measures to be taken in the fuel market to maintain the price freeze and security of supply. This was the first time that access to the capped fuel price of HUF 480 was streamlined, allowing trucks over 7.5 tonnes and foreign vehicles over 3.5 tonnes to fill up only at the high-pressure pumps at market prices.
- Then, at the end of May, it was announced that, in order to avoid 'fuel tourism', Hungary would set different fuel prices for vehicles with foreign plates and those with Hungarian plates.
THE EUROPEAN COMMISSION OPENED ANINFRINGEMENT PROCEDUREAGAINST HUNGARY OVER THE NEW DUAL FUEL PRICE REGIME,
requesting the Hungarian authorities to comply with EU law provisions with regard to the free movement of goods and services including transport services, the freedom of establishment, the free movement of citizens and workers, the principle of non-discrimination as well as rules on notifications under the Single Market Transparency Directive. - Then, at the end of July, another restriction was imposed, and the HUF 480 price was then maintained only for private vehicles, taxis and agricultural machinery. As a precursor of the tightening, Mol announced the shutdown of its Százhalombatta refinery for maintenance, which has made the supply of petrol in the country more difficult. Minister in charge of the PM's Office Gergely Gulyás said at a Government Press Briefing that the two ways of supply are imports and the use of strategic stocks. The latter was only possible to a certain extent, and covering demand from import was not an option, because
IT WAS NOT WORTH IT FOR FOREIGN SUPPLIERS TO EXPORT TO HUNGARY AT THIS FIXED PRICe.
- As of November, Mol restricted the top-up volume at its local pumps at 100 per litre per transaction. Other networks introduced (much) lower limits on capped-price fuels.
- Due to the prolonged maintenance work at the Százhalombatta refinery and the loss of imports, which used to account for 30% of domestic fuel consumption, fuel supply problems became more and more serious at the end of November, and the population started panic buying, with partial fuel shortages occurring practically throughout Mol's network. Subsequently, the fuel price freeze was phased out, although it was supposed to remain in place for longer.
Cover photo: Getty Images
