Estonian fuel prices: Cartel or market peculiarities?

Traffic on Laagna tee in Tallinn's Lasnamäe District.
Traffic on Laagna tee in Tallinn's Lasnamäe District. Source: Ken Mürk/ERR

After three months of stability, all gasoline sellers increased their prices simultaneously last week. On Monday, prices increased again. The main gas station chains justify the joint price movements on the market by Estonian market peculiarities.

If you ask any fuel retailer, at any time, about price rises, the possible answers are already on everyone's mind. Enough jokes have been made on the subject. So there is nothing surprising in the message from Raimo Vahtrik, sales director of Circle K.

"We were the company that made these price changes and the reason for this is the rapid increase in purchase prices. And this rapid growth has started since July. And since I am also responsible for the Estonian, Latvian and Lithuanian markets, the situation has been the same in Latvia and Lithuania. That retail prices have been rising steadily throughout July," Vahtrik said, explaining the simultaneous price increase on July 26 at 13:00.

Indeed. For example, the price of Brent Crude, a particularly light crude oil, has increased by nearly 13 percent in a month to $83 per barrel, and oil accounts for approximately half of the cost of fuels. In the communication from Circle K, it is noteworthy that while prices in Latvia and Lithuania have been rising throughout the month of July, they are now rising in Estonia.

Dennis Antamo, the CEO of Neste Estonia, told ERR that, based on his familiarity with the Finnish market, prices at fueling stations and within the chain vary widely and fluctuate frequently.

For example, Neste, which operates around 600 gas stations in Finland, has constantly fluctuating prices; and not at all the gas stations at once.

"I would say that in Finland, gas prices can fluctuate 10, 30, or even 100 times per day. Also, Finland's market is more fragmented than that of Estonia due to the presence of small local markets. However, Estonia is a small country, so this may be one of the reasons why the price differences are not that noticeable," Antamo said.

Neste's behavior in Estonia is normal for the Estonian market. It evaluates the prices of competitors and determines whether or not to alter its own.

"Usually, someone will notice a competitor's price change and notify the pricing team via phone call or text message. We will then decide whether to take action," Antamo went on to say.

Circle K even says that it is in the job description of their employees to monitor prices at nearby gasoline stations.

"At the intervals that have been agreed they will enter the prices of our competitors into our central system, so we know what is happening," Vahtrik explained, but he declined to specify how often the company conducts this activity.

Rauno Raudsepp, the head of Terminal, a fuel retailer based in southern Estonia, told ERR that their company does not operate any differently from the Estonian market. You look at other people's prices and set your own price accordingly.

The Terminal Oil employs 400 people, and if someone notices a price change somewhere, it is reported to the central office, which then decides whether or not to change the price, Raudsepp said.

Terminal Oil said that they established uniform prices at all fuel stations to eliminate regional price disparities. While business logic would suggest that there may be a case for price differentials in some places, the cost of logistics is similar across the country.

Circle K representative said that they continue to have certain regional price differences. Not all prices are the same at all filling stations, but in highly competitive areas such as Tallinn they are.

"In Tallinn, I would say the competition is so fierce that you can see one filling station and then another. It's hard to imagine more geographic competition than in Tallinn in any other European city," he said.

Why there is no longer a distinction between the postal rates of self-service and full-service gas stations is a separate question. For many years prices were cheaper in forecourts than in places where you could interact with the attendant and use the restrooms.

The CEO of Neste said this is also the case in Finland and that he fails to understand the price differences.

Circle K, on the other hand, said that a full-service gas station is no more expensive to operate than an automated one in today's economy. In any case, it is possible to pay for fuel at a large gas station without entering the station, and gas stations usually generate revenue by selling goods and other services.

"An attendant is in charge for the shop's food and coffee sales. They have minimal direct involvement with the sale of gasoline," Vahtrik said.

Circle K Estonia's annual report for the financial year ending May 2021 states that fuel sales accounted for 76.8 percent of the company's turnover and other retail sales in stores for 21.5 percent. However, the margins are not the same for both product groups.

No one has a particularly clear explanation for why prices at Estonian gas stations fluctuate in this way. Buying-in prices are similar for all of them — fuel is supplied to Estonia mainly from Orlen's Lithuanian facility, from Neste in Finland and to a lesser extent from other suppliers such as Opter in Muuga.

"The retail sector is very consolidated. We have few participants. So if there were many more participants in this market, there would be a great deal more fluctuation," the head of Terminal Oil said, adding that the company itself entered the retail market in 2014 precisely because it saw an opportunity to gain market share in a consolidated market.

In comparison to the Finnish market, the director of Neste Estonia said that the Estonian market has been passive for years. "According to the data, when prices are relatively stable market share is also relatively stable," he said. "Certainly, market share can be increased by being more active."

"As your market share increases, you can increase your profits. In other terms, two approaches are possible. If you are satisfied with your sales volume, you can attempt to generate a profit, or you can try to expand your market share and generate a larger profit on higher sales. It depends on your targets and vision," Antamo said.

"We were focused on price for many years, but we have decided not to be that active at the moment. We may rethink, but we will see," he said.

Terminal Oil more or less reflects this assessment. "Pretty much the pressure from many in the market is to take on the price and then quietly go along. But if somebody wants to make a better price, to bring it down, they won't be allowed to do it, as everyone will come right along. And then there's this daily kind of playing checkers," Raudsepp said.

"Whether this is the case or not, and whoever puts the best price on the market that day, in fact, most people will follow you within minutes and that's the peer tracking I'm talking about. There isn't really anything mystical here," Raudsepp added.

Others are angry at Olerex

Finally, there is Olerex. This company's competitors are furious. Other market participants assert, either directly or indirectly, that Olerex's actions have significantly hampered competition.

The company is suspected of importing fuel into Estonia without meeting biofuel requirements, thereby substantially undercutting its input price, prompting the opening of a criminal investigation.

"If a competitor does not comply with the bio-commitment, he receives a five-figure price advantage," Raudsepp said. "In the past year, Olerex and its subsidiaries have essentially generated more than €30+ million. However, this was created wholly at the expense of competitors and the end consumer."

The head of the Terminal said Olerex is gaining market share in this segment by offering extremely low prices to business customers. Other fuel retailers are hesitant to compete with Olerex because, according to them, Olerex's price is always lower than theirs and is subject to even further reduction.

"After the violation has been halted and normal market conditions have been restored, it will be possible to price competitively and contend in the markets once more. Basically, the competitive situation has been fractured for the past year and a half," Raudsepp explained.

Due to this criminal investigation, Olerex may also be hesitant to commence a price war, according to the CEO of Circle K. "If you're the subject of a criminal investigation, it's possible you're not attempting to use this illegal advantage," Vahtrik added.

If the market situation improved, Neste could become more active in fuel pricing, according to the company's CEO.

"If some market participants fail to comply with the bio-addition requirement or manipulate the market, things don't add up; if a competitor does not fulfill all of their obligations, it can be challenging to actively manage prices," Antamo said.

Olerex was unavailable for comment to ERR, with Andres Linnas, the company's chief executive, saying that he was on vacation and would return to Estonia on August 16.

Competition Authority investigates, investigates...

In addition, the competition authority has begun its own investigation into the gasoline market's peculiarities. Fuel companies were sent extensive questionnaires that required them to provide the authority with the basis for their sales price calculations, answer a lengthy questionnaire, and submit a vast array of data.

The competition authority received answers from nine fuel retailers by July.

Hege Pärn-Lee, head of the Estonian Competition Authority (Konkurentsiamet) said the investigation is in the works and will be completed within the next year.

According to the law, no single fuel retailer has more than a 40 percent market share in Estonia. At the same time, there are precedents at the European level in which completely independent companies can act as a group and attain dominance without any illegal agreement. Last year, Estonian fuel retailers performed well. The five largest corporations increased both revenue and profits. Although other activities contributed to the results of many businesses, fuel sales accounted for the vast majority of revenue.

* Financial year 01.05.2021 - 30.04.2022 Source: ERR


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Editor: Huko Aaspõllu, Kristina Kersa

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