Georgia’s Murky Oil Oligopoly Syndrome
29 January, 2015
Georgia’s Murky Oil Oligopoly Syndrome
Is the Georgian fuel market monopolized? – This is the question that the Competition Agency, an anti-trust body of Georgia, must to find an authentic answer to in no later than 10 months. Georgian Prime Minister Irakli Gharibashvili has tasked this anti-trust body with researching the Georgian fuel market as soon as possible in order to put an end to the constant speculation and rumors about the alleged monopolization of this market.

Fuel prices are of paramount importance to Georgia,
especially considering its 100 percent dependence on imported oil products. This largely defines prices on consumer goods. Yet the revelation of truth still seems far away.
The agency has already completed the midterm report and submitted it to the PM’s office. However, details of the report are unfortunately unavailable to the public until the final conclusion is made. In accordance with the anti-trust law, the final verdict may take from three to ten months. The agency may even reach a conclusion faster than expect, yet claim the case is difficult.
“We do not know how long the comprehensive research may take,” Nino Tsivtsivadze, the Agency’s spokesperson, told Georgian Journal. “In the meantime, we cannot publish the midterm report, for it may have a negative effect on the research process.”
As the agency deals with this issue, crude oil prices continue to drop. In turn, speculations about this decrease are not adequately reflected by the Georgian market and thus gain more and more momentum. Most Georgian analysts believe that the profits of oil product importers in Georgia are now higher than ever, so they ask the agency to disclose its midterm report.
According to Paata Bairakhtari, spokesperson for the Association of Young Financiers and Businessmen of Georgia (AYFB), “Global petrol prices fell 58 percent while prices here in Georgia dropped only about 15-18 percent.” Based on recent market analysis, AYFB concluded that importers are enjoying a colossally high profit margin ranging from 0.70 to 0.80 GEL per liter of petrol/diesel.

According to official statistics, 373.9 thousand tons of petrol and 529.6 thousand tons of diesel were imported into Georgia in 2014. Accordingly, the average net profit of these companies combined was 449,746,080 GEL. To put it plainly, Georgian consumers and companies paid almost half a billion lari to these importers.

This figure is almost four times higher than the profit margin that oil product importers were seeing before 2012. Back then, profit margins fluctuated between 0.05 and 0.20 GEL per liter, according to Beka Kemularia, Head of the Consumers Rights’ Protection Society. He believes that the market monopolization is so obvious that the agency doesn’t need to drag the research out for 10 months. For the sake of transparency, Kemularia requests that the agency publish the midterm report to shed more light on the issue.
“Prices of gasoline dropped by what is equivalent to 0.80 GEL per liter all over the globe. However, in Georgia, the drop was just 0.30 GEL per liter, less than half of what it should have been. Back in 2008, when there were 34 oil product importers operating in the market, the profit margin was within 0.05-0.20 GEL per liter. Now companies enjoy a profit margin of 0.40-0.70 GEL,” Kemularia stated in an interview with Georgian Journal.
According to Kemularia, the expenses of these companies—including transportation costs, utility bills, taxes, etc.—comprise just 0.10 GEL per liter, which means that today they enjoy roughly a 0.70 GEL profit per liter on both petrol and diesel since last summer’s price drop. On average, companies saw a profit of roughly 0.40 GEL per liter of fuel in 2014. As none of these companies have disclosed their recent sales, earnings and profit margins, an average profit figure was estimated by simple math.
According to official statistics, 373.9 thousand tons of petrol and 529.6 thousand tons of diesel were imported into Georgia in 2014. Accordingly, the average net profit of these companies combined was 449,746,080 GEL. To put it plainly, Georgian consumers and companies paid almost half a billion lari to these importers.

“We pay 50 percent more for petrol than consumers in developed countries such as Germany, for example. Business operation costs, including taxes and utility bills are much higher in Germany and Europe. In general, salaries and purchasing power are also leagues above ours, but the prices here are 52 percent higher: This bespeaks of cartel agreements.”

The latest balance sheets of the big five oil product import companies, which operate in Georgia and are suspected of having a cartel agreement, are not available. Some of them avoid commenting on the issue, while the comments of others are very sparse. Wissol Georgia, for example, claims that it reduced prices by 36 percent and says that their business operation costs did not decrease. Kemularia counters this claim by saying that their business operation costs have, in fact, been decreasing since 2008. If expenses comprised 8.6 percent of sales in 2008, now they are only 5.6 percent. Oil prices were cut, while profit margins grew.
“We pay 50 percent more for petrol than consumers in developed countries such as Germany, for example,” Kemularia elaborated. “Business operation costs, including taxes and utility bills are much higher in Germany and Europe. In general, salaries and purchasing power are also leagues above ours, but the prices here are 52 percent higher: This bespeaks of cartel agreements. In 2008 the profit margin was lower because there was competition. Thirty-four different companies operated in the Georgian market. Today only five companies remain. There are a few small independent (non-franchise) petrol stations, of course, but they comprise only five percent of the market.”
Bairakhtari emphasizes the economic unhealthiness of the current lack of competition. “What we have here is a bunch of companies that cut or increase prices simultaneously and these changes are far from the international price trends. This poses questions that must be answered. Otherwise all evidence indicates an existence of oligopolies,” he said.
Levan Pavlenishvili, a researcher at the Economics Policy Institute of the International School of Economics at Tbilisi State University believes that the oil product importers’ behavior is essentially adequate based on market trends and business operation rules in general. The free market principle allows companies to establish any price they want as long as the market can afford them.
“Georgia is a small market and companies that operate here cannot behave like energy giants such as Chevron, Exxon or BP that operate in Germany, since we are using this country as an example. The German economy is worth over two trillion USD while the Georgian economy comprises barely 16 billion. So it hardly comes as a surprise that companies operating in Germany can afford to lower their prices.”
For Pavlenishvili, the real problem of the Georgian fuel market is the lack of transparency of official data.
“I cannot claim that the profit figures I have calculated are exact because they are based only on data that is available to the public and most likely flawed and insufficient. In reality, these figures may be higher or lower. Companies do not disclose their balance sheets, and this is normal. Neither does the Statistics Department keep the official sales figures of the fuel market. Key indicators of petrol prices, such as transportation costs, taxes, oil prices and everything else that factors into the final price of petrol must be publicly available on governmental websites. Both the US and Europe are good examples of this. Their energy ministries’ websites provide consumers with authentic information about petrol prices on a daily basis. But you won’t find anything of the sort in Georgia. The Ministry of Energy and the Statistics Department must cooperate to create such a service to provide public information. This will make the price-making picture more transparent. Otherwise, all calculations are more speculation than facts” Pavlenishvili said in his interview with GJ.
He believes that even if the Competition Agency reveals and punishes monopolists, it will not solve the problem as long as the system itself lacks transparency. The culprits will simply pay their fines and continue with their predatory practices.

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