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Chain reaction triggered by skyrocketed prices on fuel
Iurie Gotisan, 8 September 2004

Oil price that hit its highest induced a price hike on fuel and diesel this year. Fifty dollars a barrel may not leave Moldovan market indifferent. Drivers would be the first one to feel on their own the short-term effects of the price hike, followed by all businesses where fuel accounts for the great part of the final cost, or where it is used as a raw material. Private transportation companies have already increased the fares for passengers. However the price hike would be even bigger in the case of goods transportation. Also, prices on food and beverages would likely be propelled further upwards; however such a decision would be taken by the manufacturers in the moths to come. Bread and bread products would be an exception as the low price on grain would likely compensate the price hike on fuel.

Goods transportation would be directly affected by price hike on fuel. Recent price "adjustments" on fuel by petrol stations, have propelled prices on diesel further upwards, which translates in higher costs for transporters. Diesel has increased by 6%, which translates in a 2% increase in costs if we are to consider that on average it accounts for 20% of the expenses. Operators shall bear only a part of the additional expenses, while consumers the rest. There are also some efficient transporters where fuel accounts for only 15% of the costs. In their case, price hike may represent only one percent of the actual tariff. Of course there are also inefficient transporters where fuel accounts for 30% of the operational costs. The prices on the domestic routes knew a modest increase, whereas on international ones price hike would have a considerable impact on cost. Therefore, it is to be expected that eventually transporters would swell the price on international goods transportation. This would lead to fierce competition, while players would loose in competitiveness.

According to government officials, supposedly a good agricultural year would counterbalance the price hike so that it does not affect inflation. However, keeping down the price on bread is far from enough to keep the inflation in the forecasted limits. Experts say the price on bread would not change even after fuel prices rose. As the bread factories purchase cheaper grain, the price hike on fuel shall be compensated by the low price on the raw materials. On the one hand, a considerable increase in prices is to be expected in two or three months upon the end of production cycles that are now working on a more expensive fuel. On the other, most likely producers would internalize those costs for fear of eventual drop in sales in case prices went up. Later on, most likely the diary products would follow. Additional expenses on transportation would show up in two months or so, when manufacturers would likely swell the prices by 10%. This would also include diary products. A 4-5% increase in vegetal oil price is expect this fall due to poor harvest this year and the same price hike on fuel. Following the same partern packaging price is also set to soar. On top of that, price hike lays the economic and psychological grounds for further increase in prices on other food.

In the end price hike on fuel would boost inflation. It is not the only factor to pose a treat to the forecasted 10% inflation rate, but also swelling bills on energy and gas as was recently announced by Union-Fenosa and Moldova-Gaz. Despite the warnings of many experts, it is said that inflation is set to soar only next year, as in 2004 growing price on fuel is to be compensated by low prices on bread. For the state budget, swelling fuel price is not necessarily a bad news as it means more excises. In fact, increased excises on fuel coupled with growing imports boosted the nominal value of revenues from excises by 40.1% over same time 2003. However growing oil quotations and imports far beyond expected ones are affecting the current account deficit. To diminish the effects of the high price of oil imported in the country, Government may want to lower the excises and abolish VAT on excises. However, so far Government is not even considering this possibility.

Oil quotations on the world markets

Both events in Iraq and problems surrounding Russian giants YUKOS and TRANSNEFTI have led world markets into believing that end of August would mark an oil crisis. Numbers have scared many investors. Even if oil hasn't hit 50 USD a barrel, still two weeks ago it was quite close, with 49.40 USD, the highest in 21 years. Now there is a 40% increase over early this year when quotations neared 32 USD a barrel. The chances that there would be a considerable drop in the near future are very slim given the ever growing demand. Only China's imports, the second largest importer after US, have surged by 40.7% in July over last tear, whereas India is expected to import 11% more in 2005 alone. OPEC countries have little if no spare capacity. They supply 30 million barrels a day.

Oil price race has raised worries in great many countries. For instance Japan's Ministry of Finance has already started monitoring its effect on the country economy, whereas American Federal Reserves took similar measures while keeping silent on whether it would affect economic recovery. Reserves are plunging in US, amidst a 3.4% surge in demand which fully covers imports from OPEC countries, Saudi Arabia in particular. Oil quotations have started going down last week once Iraq resumed exports, which calmed down fears of an oil crisis.

Both US and European stock markets were affected by strife-torn Iraq and high oil quotations. After oil price race sent stocks down, falling oil quotations have now sent the stocks up. Experts say that a new oil price surge is unlikely, except for cases when market fears over an eventual crisis would turn real. There is a growing optimism fuelled by clearing situation in Venezuela, stabilization of Iraqi exports and positive signs from YUKOS.






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