In recent weeks, Estonia’s fuel market has been hit by a storm not seen in years. After one foreign player slashed prices, motor fuel costs now shift not by days or weeks, but by the hour. Raivo Vare explains what is driving this disruption and what longer-term goals may lie behind it.
Forecasting is a thankless task, but in order to understand where our motor fuel prices might head in the future, it is worth once again explaining what factors actually determine the price displayed on the fuel station sign.
First, we must take into account that the final retail price of fuel includes, in one way or another, all costs associated with producing and delivering it to the end customer. This covers the production of the fuel itself, logistics — an extremely competitive sector on its own — as well as distribution and storage. On top of this, there are state-imposed costs in the form of taxes and various other charges. In developed countries, these make up well over half of the per-liter price paid by the consumer. Tax revenue from fuel sales is among the most reliable and stable income sources for governments.
The fuel business is a volume business and the winners are those who can manage their supply chains and forecast market trends the most efficiently and optimally. An increasingly important additional revenue stream for fuel sellers today also comes from the wide range of extra products and services they offer customers.
We must also keep in mind that, starting in 2027 according to current plans, the European Union will introduce a new emissions trading system known as ETS2 (Emissions Trading System 2). While it primarily concerns the transport sector, its effects will filter through into the prices of most goods and services.
This means fuel sellers will be required to purchase CO2 quotas, which in practice translates into a growing carbon cost component in fuel prices. Put simply, once the new system takes effect, fuel prices will rise.
As is well known, there are no oil deposits in the Baltics and all raw materials needed for motor fuel production must be imported into the region. After Russian fuel imports ceased, the closest refineries producing motor fuels from imported crude oil for our region are located in Finland and Lithuania. Apart from occasional shipments arriving by sea from farther afield, practically all fuel on our market comes from these two sources, one of which is controlled by a company that holds significant market power in the regional fuel sector (Neste .
It is no exaggeration to say that such vertical integration — covering nearly the entire supply chain — gives this company far greater flexibility (and with it, the ability to shape end prices) than a locally owned company could ever achieve. In a small market like Estonia’s, this inevitably leads at some point to a “price war,” which we have in fact witnessed over the past month.
What does such a supply chain, based in reality on just two or three sources, mean for our energy security? Large corporations, regardless of sector, tend to retrench around their home markets in times of crisis. If foreign-owned companies scale back or withdraw entirely from the Estonian market in such circumstances, it falls to local companies to fill the void.
A local company cannot simply pack up and leave during a crisis, because this is its home market. Its business, its employees and in turn their families and livelihoods are here. They are therefore tied to this market to a far greater extent and withdrawal is not a realistic option.
It is often said that Estonians prefer Estonian products, but does this principle hold when some market players launch a price war that results in fuel being sold below cost in Estonia? The advantage lies with those who have the deepest pockets to sustain such a war of attrition.
What is clear is that in a changing and constantly shifting market environment, customers are making more and more purchasing decisions based on emotion. That, in turn, is an argument in favor of locally owned companies. It is well known that maintaining an existing customer relationship is far less costly than acquiring a new one, and a local customer is relatively likely to prefer a domestic seller even if the pump price is slightly higher.
It must be acknowledged that capital does indeed have a nationality and while quick wins may be possible in the current situation, in the long run the winners will be those who play the long game in the Estonian market. The winners will be those who care that in one, five or ten years, Estonia remains a place where it is good to live, where roads are well maintained, children can grow up safely and life progresses. But that future ultimately depends on Estonian consumers making value-based choices when buying fuel, rather than chasing short-term savings.
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