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Latvia’s fuel retail sector is fiercely competitive, boasting one of Europe’s highest ratios of gas stations to vehicles, according to Jānis Vība, chairman of the board of JSC “Virši-A”.This intense competition, however, is creating challenges for smaller businesses.
Vība highlights the significant capital investment required in the fuel industry. He notes that many smaller players are struggling to keep pace with necesary upgrades and maintain quality standards, leading to a decline in their market share. The Latvian fuel market, he adds, is currently stagnant, with overall fuel consumption still below pre-pandemic levels.
Looking ahead, the planned excise tax increase next year adds another layer of complexity. When asked about the impact on fuel prices, Vība explained, “Roughly half of the fuel price is the price of oil products on the stock exchange, and the other half is taxes, traders’ expenses, mark-up and other factors.”
Oil price volatility throughout 2024 underscores the global factors at play. Geopolitical events, particularly the escalation of the Israeli-Hamas conflict in April, sent oil prices soaring to a high of $92 per barrel. Concerns about potential Iranian involvement further fueled these price increases.
The Middle East’s strategic position as a major oil exporter makes it a key player in global energy markets. Fluctuations in this region directly impact prices worldwide, with ripple effects felt in countries like Latvia and ultimately impacting consumers at the pump. The situation highlights the interconnectedness of global events and their impact on everyday life, even in seemingly distant markets.
Latvia’s Excise Tax hike: A Balancing Act between Budget Needs and Economic Competitiveness
Latvia is facing a delicate economic balancing act. The government plans to increase excise taxes on gasoline and diesel fuel next year, a move that’s sparking debate about its impact on the nation’s competitiveness and overall economic health. While the increase aims to bolster government coffers,particularly for military spending,critics worry about the potential negative consequences for businesses and consumers.
The planned increase will add 2.7 cents per liter to gasoline and 3.2 cents per liter to diesel. “Even though such an increase is not welcome,as it will negatively affect the competitiveness of producers and the economy,” notes Jānis Vība, “this action is the government’s attempt to provide additional funds,for example,for spending on the military industry. In conditions of economic stagnation, tax changes become a way to compensate for the needs of the state.”
The situation is further complicated by global oil price fluctuations. While prices have remained relatively stable this year, between $70 and $90 per barrel, the geopolitical instability in the Middle East remains a significant wildcard. “On the supply side, an critically important factor is the geopolitical instability in the Middle East, which, if aggravated, may negatively affect the volume of oil supply in the market,” explains Vība. “At the same time, the opposite effect is also possible – the policy of the newly elected US President could be aimed at increasing oil production in the US, which would reduce the influence of the Middle East on the market.”
Analysts predict oil prices to hover between $70 and $80 per barrel next year, but this forecast is far from certain. World economic growth and the expansion of renewable energy sources will also play crucial roles in shaping fuel demand and, consequently, prices. ”On the demand side, fuel prices are influenced by two main factors,” Vība points out. “The frist is world economic growth – the faster it will be, the greater the demand for fuel will be. The second factor is the development of renewable energy, which is increasingly influencing the energy market by reducing the consumption of fossil fuels.”
However,there’s a potential silver lining for Latvia. Compared to its baltic neighbors, Lithuania and Estonia are expected to implement even steeper excise tax increases next year. This could inadvertently benefit Latvia, attracting international transport companies seeking cheaper fuel. “The positive news for the Latvian economy is that, compared to the other Baltic states, next year excise tax rates will probably increase more in Lithuania and Estonia,” Vība notes. “This means that international transport companies could choose to refuel in Latvia, which would contribute to excise tax revenues for the country.”
The impact of Latvia’s excise tax hike remains to be seen. While it aims to address pressing budgetary needs, the potential negative effects on economic competitiveness and consumer costs are significant concerns. The interplay of global oil prices, geopolitical events, and renewable energy adoption will all contribute to the final outcome.
latvia’s Fuel Future: Balancing excise Tax Hikes with economic Competitiveness
Latvia is bracing for a notable change in its fuel market as the government prepares too increase excise taxes on gasoline and diesel next year. This move, designed to bolster government revenues, particularly for military spending, has sparked debate about its potential impact on the nation’s economic competitiveness and consumer costs. To delve deeper into the implications of this policy, Brno News Senior Editor, David Miller, sat down with Dr.Elīna Zaļā, a leading economist specializing in energy markets and taxation in the Baltic region.
David Miller: Dr. Zaļā, thank you for joining us today. Latvia’s planned excise tax hike is generating a lot of discussion. Could you shed some light on the potential consequences for the Latvian economy?
Dr. Elīna Zaļā: certainly, David. The excise tax increase is a double-edged sword. While it will undoubtedly provide much-needed revenue for the government, perhaps bolstering military spending and other crucial public services, it’s likely to have a cascading effect on businesses and consumers.
David Miller: How so?
Dr. Elīna Zaļā: Rising fuel prices directly impact transportation costs for businesses, making goods and services more expensive.This can dampen consumer spending and slow down economic growth. Consumers themselves will feel the pinch at the pump, potentially leading to a decrease in discretionary spending.
David Miller: You mentioned global oil prices. How will they factor into the equation?
Dr. Elīna Zaļā: oil prices are notoriously volatile, influenced by a complex interplay of geopolitical events, production levels, and global demand. Any significant fluctuations in oil prices will amplify the impact of the excise tax increase. As a notable example, if oil prices rise sharply next year, the combined effect on fuel costs in Latvia could be significant.
David Miller: Latvia’s fuel market is already quite competitive. How might this tax hike affect smaller fuel retailers?
Dr. Elīna Zaļā: The excise tax increase will place added pressure on smaller fuel retailers who are already struggling to compete with larger chains. They may be forced to absorb some of the cost increase, potentially squeezing their profit margins, or pass it on to consumers, risking a loss of market share.
David Miller: Are there any potential silver linings?
Dr. Elīna zaļā: Interestingly, Latvia’s planned excise tax increase is relatively modest compared to its Baltic neighbors, Lithuania and Estonia, which are expected to implement even steeper hikes. This could,ironically,attract international transport companies seeking cheaper fuel,potentially benefitting Latvian tax revenues.
David Miller: Dr. Zaļā, thank you for providing us with thes valuable insights. It seems Latvia is boarding a complex economic ship, navigating between the need for increased revenue and the potential ramifications for its fuel market and overall economic health.
Dr. Elīna Zaļā: You’re welcome, David. It will certainly be a fascinating situation to observe in the coming months.
