Deficit During Growth: Where Did The Sharp Increase in Fuel Consumption Come From?

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On April 3, 2023, at a CCS briefing, former Minister of Energy, Bolat Akchulakov, noted that, despite the increase in production, Kazakhstan is facing a shortage of diesel fuel. In 2022, the production of both diesel fuel and gasoline demonstrated record numbers: the output of diesel fuel increased by 8.5%, to 5.4 million tons, gasoline — 3.1%, to 5 million tons

As reported by Ranking.kz, a noticeable increase in the production of petroleum products occurred after the years 2017 and 2018. The program of reconstruction and modernization of all three domestic refineries was completed at that time. As a result of the modernization, the production of light petroleum products has increased: gasoline — by more than 2x, jet fuel by 3x, and diesel fuel by 1.3x. This theoretically allows for the complete satisfaction of the domestic market's needs.

Kazakhstan is facing a fuel shortage in practice, however. The reason is a significant increase in consumption. According to the Ministry of Energy of the Republic of Kazakhstan, consumption growth is observed in relation to all types of light petroleum products. By the end of March 2023 alone, diesel fuel consumption increased by 15% compared to the same period last year. As a result, the country may face a fuel shortage of up to 850 thousand tons.

Graph: ranking.kz

The main and severe reason for the formation of fuel shortages is the growth of transit traffic, leading to the fact that domestic fuel is simply "washed out" — exported from the Republic of Kazakhstan to neighbouring (and not only) countries. The volume of vehicle transit traffic (truck trailer or semi trucks) is growing from year to year. According to the latest available data, the volume of transit cargo transportation by road increased by 31.5% in a year (2021). The continuous and dynamic growth of transit traffic through Kazakhstan coincided with the completion of the modernization of domestic refineries. Before that, the dynamics had been uneven. There were periods of both growth and decline (see graph). As a result, high transit flow rates lead to an artificial shortage of fuel within the Republic of Kazakhstan, which importing "covers".

On the one hand, the fact that Kazakhstan is becoming a key transport hub of the region is a positive indicator, as the republic has aspired to achieve this. On the other hand, cargo trucks coming to the Republic of Kazakhstan from abroad not only refuel in the country but also stock up substantial reserves along the entire route, taking out the maximum fuel that they can. This only compounds other problems and the existing burden on the infrastructure.

Graph: ranking.kz

The reason for such an outflow of domestic oil products from the country is the price disparity. The cost of gasoline and diesel fuel in Kazakhstan is much lower than in most countries, including our neighbours. According to GlobalPetrolPrices.com, the average cost of gasoline in Kazakhstan as of March 27 was 0.469 US dollars (212.6 KZT) per litre, while in Russia — 43.7% more expensive (0.674 US dollars, or 305.48 KZT), in Kyrgyzstan — 47.5% more expensive (0.692 USD. USD, or 313.6 KZT), and the difference with Uzbekistan was more than 2 times (0.945 USD, or 428.5 KZT).

In addition to the relatively "natural leaching" of fuel by transit workers, there are also cases of intentional export from Kazakhstan via "grey" smuggling schemes. In this case, trucks are not only refuelled in excess of the permitted norm but also equipped with additional tanks for the export of petroleum products.

RMB: The latest ban on the export of fuel by road has been in effect in Kazakhstan since January 31 of this year.

Despite restrictions, cases of illegal export of fuel and lubricants occur. 288 facts of illegal export of fuel from the territory of the Republic of Kazakhstan have been recorded since January 31, 2023. Of these, 94 facts of illegal export of petroleum products were revealed at the external border, a fine of more than 1.5 million KZT was imposed by a court, and 2.3 thousand litres of gasoline and 25.3 thousand litres of diesel fuel were confiscated. 194 facts of the export of fuel (more than 63.8 thousand litres) have been established at borders with the EAEU countries. In total, in a short period, attempts to illegally export more than 90 thousand litres of fuel were stopped. How much more illegal fuel export could have been prevented remains unknown.

Note: the resale of Kazakhstan's fuel in neighbouring countries brings smugglers a very serious profit. If we take into account the difference in prices, the profitability of such operations for diesel fuel can vary between 40% -100%, and for gasoline - 44% -105%.

Graph: ranking.kz

In addition to the outflow of fuel to neighbouring countries, low fuel prices have another negative side: the situation does not allow the oil and gas sector to attract investment and develop or to conduct geological exploration and replenish the resource base. Artificial price restraint traditionally leads to a lack of investment inflows. Now the country's refineries are operating on the principle of self-sufficiency, while there is no significant profit in question. In the current paradoxical situation, the state is suffering significant damage for the sake of keeping fuel prices and indirectly subsidizing foreigners and even smugglers.

According to the Ministry of Energy, the only solution to the problem is to reduce the price disparity. This is a necessary measure: if earlier the deficit was covered by an increase in the production of petroleum products, now the country's refineries are operating at maximum capacity. A significant increase in production is highly unlikely in subsequent years. If measures are not taken now to stop the outflow of fuel, then taking into account the annual growth in the transit traffic volume, Kazakhstan will face an all-out deficit in the near future, which will create a direct threat to the energy security of the republic.

Artificial, and often ill-conceived, unbalanced price restraint is generally a burden on a country's energy sector. An attempt to play against the laws of the market instead of developing an adequate program to support the population while maintaining the real price level has already led to tragedies. Indeed, the containment of electricity tariffs led to the fact that the country's power plants were left without the necessary investments and also to numerous accidents on the networks along with a colossal level of wear and tear. The emergency situation in Ekibastuz and Ridder is very indicative. At Toqayev's behest, the implementation of the "tariff in exchange for investment" program was launched post-factum. Its goal is to improve the situation with the inflow of capital investments in the sector.

As for the prices of petroleum products, it is well known that in Kazakhstan they are among the lowest in the world. Kazakhstan is in the top 10 countries with the cheapest gasoline and the top 15 countries with the cheapest diesel fuel. The difference may be significantly higher with near abroad countries such as Europe and America.

If we consider the change in prices for gasoline and diesel fuel in the Republic of Kazakhstan in historical dynamics, it can be noted that the growth occurred at a moderate pace compared to other socially significant products and goods. The graph below shows that there have never been significant jumps in the sector. In addition, the set price has been kept within the same level for quite a long time, as it is regulated by the state's authorised bodies.

According to the Ministry of Energy of the country, in 2018-2022, diesel fuel prices in Kazakhstan increased by 29.2%, while in other countries — by more than 75%. We would like to single out that, in dollar terms, diesel fuel prices in the Republic of Kazakhstan have not changed at all in 5 years. The situation with gasoline prices is similar.

Graph: ranking.kz

It is worth noting that a number of measures are planned to further increase the production of petroleum products and contain the deficit.

Original Author: Maxim Bolotov

DISCLAIMER: This is a translated piece. The text has been modified, the content is the same. Please refer to the original article in Russian for accuracy.

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