Is the Price of Gasoline Gaining Momentum?

How is the price of gasoline formed in the market?

First, let us study the price of gasoline in the countries of the region, which are mainly considered petroleum importing states. Let me note that compared to our neighbors and EAEU countries, the price of gasoline in Armenia is the highest. However, the reasons for this are primarily transportation costs and the fact that Armenia is not a petroleum producing state. At this moment, calculated in AMD, the price of AI95 premium class gasoline in Georgia is about 465 drams, while in Armenia it is 530 drams. In this material we will study what influence gasoline importers actually have on gasoline pricing.

Chart 1.

Chart 2 presents the total volume of gasoline import in millions of kilograms. As can be seen from the chart, the volumes of petroleum imports were almost unchanged from 2010 to early 2019. Starting from 2019, a continuous and stable growth in petroleum imports was recorded. In 2017, 200 and 140 million kilograms of diesel fuel and gasoline were imported respectively, and in 2023 it was already 300 and 225 thousand kilograms. Total petroleum imports grew by 1.5 times over the last 5 years. It is also remarkable that during 2023 almost no quantitative growth in petroleum imports was recorded, and from the middle of that year the growth has a negative trend. Petroleum is an important energy source that powers transportation and industrial activities. When a country imports more petroleum, it generally means that domestic energy demand is increasing. This can be an indicator of a growing economy, evidencing growth in consumer spending, business activity, and industrial production.

Chart 2.

Chart 3 presents the change in the price of gasoline. The price of gasoline, before the growth recorded in 2023, was highest in April 2022 when 1 liter of premium gasoline cost 540 drams. At the end of 2022 the price of premium gasoline dropped to 350 drams for 1 liter, which was recorded in February 2023. In 2023 a continuous increase in fuel prices was recorded. We will discuss next what drove this increase. From 2024 the price of gasoline began to fall, as we had forecasted in November 2023 when the highest gasoline price of that year was recorded. However, changes in the global petroleum market did not allow the price of gasoline to drop in the domestic market to the forecasted level, and at this moment we are on a plateau. However, the global price change of petroleum did not allow gasoline in the domestic market to drop to the forecasted level and it is currently sitting on a flat line.

Chart 3.

Below is presented the import price of gasoline and diesel fuel. It was calculated by dividing the value and physical data of imports for the given month, which yielded the import value per kilogram of gasoline price in US dollars. The obtained indicator was divided by the density of gasoline and diesel and multiplied by the average US dollar to dram exchange rate of the given month. Of course, the obtained indicator has a certain accuracy issue because the density of petroleum can change according to temperature, and one must also consider the selling price of the dollar in the domestic market rather than the average exchange rate. However, the dynamics of this indicator can give a clear idea of how different the price of petroleum at the border is, which our business operators acquire. It is the price bought at the border for gasoline and diesel fuel that forms the price of gasoline in the domestic market.

Chart 4.

Let us also examine the import of petroleum by countries. 76.6 percent of diesel fuel is imported from Russia, 11.9 percent from Iran. What is interesting is that although a liter of gasoline has a very low price in Iran’s domestic market, it is imported into Armenia at almost the same price as from Russia. This could have political reasons. The price of petroleum coming from Russia is expensive because transportation costs are high, while we have a direct border with Iran. Let us also note that Georgia also carries out a significant part of its gasoline import from Russia.

Chart 5.

The final chart presents the dynamics of the import price and the market price for gasoline and diesel fuel. As can be seen, the import price and the market price have a high degree of correlation. That means Armenia’s domestic market is quite competitive and cannot dictate the domestic price. The price at which the business operator buys petroleum at the border is comparable to the price the ordinary citizen pays.

Here the domestic market price was calculated according to the Consumer Price Index database, which was multiplied by the domestic market petroleum prices recorded at the end of October 2023. Both indicators presented in the chart, the price at the border and in the domestic market, have a margin of error. This is the reason that in some cases the price of gasoline in the domestic market is lower than at the border. Regardless, the chart clearly shows that the price of petroleum at the border forms the price in the domestic market. However, it is not excluded that the gasoline importer reduces the density of gasoline, which is also the reason that during some months the price of gasoline is higher at the border than in the domestic market. Let us state again that some error is possible in the data, and the final statement might not correspond to reality and requires laboratory research.

The market is competitive and quickly reacts to changes in gasoline prices at the border. To regulate the price of gasoline and lower it, it must first be regulated at the border. Armenia is in the EAEU common market and according to the EAEU agreement there should be a common energy resources market. The relatively high price of gasoline is primarily due to transportation costs. It is possible to diversify gasoline import and import it from Iran, from where transportation costs would be lower, but this is already an issue of political economy and the formation of new infrastructures.

Chart 6.

* All data in this analysis are taken from official sources, specifically the monthly database of salaries, number of employees, and organizations’ fuel price increases according to SC since 2017, the monthly database of fuel imports by 6-digit foreign economic activity codes and countries. As well as an internal source for daily data on gasoline and diesel fuel prices. The calculations are fully available on github; they can be checked by visiting our github page, where the data, calculation, and chart codes are provided.