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Refinery Profit Margins and Fuel Prices in Turkey - Gökberk Bilgin


Gasoline and diesel prices are increasing every day in the world. In the United States, the prices passed 5$ per gallon ($1.45 per liter). A major reason for these spikes apart from the oil prices is the increasing refinery profit margins. During the first quarter of 2022, major refineries in the United States made $10 billion of combined profit, setting a record. US President Joe Biden sent a message to refiners to increase their output and reduce their profit margins last week. In his letter to refiners, Biden wrote, "at a time of war, refinery profit margins well above normal being passed directly onto American families are not acceptable." A day after, a group of refiners defended their position by stating that "the US refineries are already running at 94 percent of the capacity and the current market conditions required complex and closer look since the refinery margins did not account for the increased operating costs that are driven by the inflation." Refiners also added that the refined product prices are determined on the global markets.


According to the Bloomberg Terminal data, the refineries' profit rates increased to 60$ per barrel. This means that alongside the price increase of the Brent oil, the consumers faced additional fees due to refinery margin. The 3:2:1 crack spread approximates the product yield at a typical American refinery. For every three barrels of crude oil the refinery processes, it makes two barrels of gasoline and one barrel of diesel. This ratio changes depending on the refinery's configuration, yet the calculation still gives a good idea about the profit rates among the global refineries. In Figure 1, you can see the changes in West Texas Intermediate (WTI) US Midland 321 Crack Spread and Northwestern Europe (NWE) Brent 321 Crack Spread, two regions, one is in the United States, and the other is in Europe since last year.


Figure 1: Refining Margins (USD/barrel (bbl))

Source: Bloomberg Terminal


Due to the increasing refining margins, Brent Oil and diesel prices spread throughout the year, especially after the Russia-Ukraine War. In Figure 2, you can see how the Brent Oil Price and CIF MED (Genoa/Lavera) ultra-low-sulfur diesel price, the price level Turkey also follows, changed over the year. According to data, while the Brent Oil prices increased 65%, diesel prices increased 148% in dollar terms over the year. Gasoline prices followed a similar pattern as well.


Figure 2: Change in Prices (%) Brent Oil vs. CIF MED (Genoa/Lavera) Diesel

Source: Bloomberg Terminal


In Turkey, as of June 20, gasoline and diesel are sold at 27,63₺ and 30,1₺ per liter, respectively. The Energy Market Regulatory Authority (EMRA) publishes a pricing report on fuels every month, giving information about the price components. I have compared the May 2021 and May 2022 reports and calculated the values in US dollars. Below you can find the results.


Table 1: Diesel and Gasoline Prices in Turkey

Source: EMRA


As you can compare from Table 1 and Figure 1, we see that diesel and gasoline prices increased by around %100-105 in May by almost $0,5 per liter compared to 2021. Wholesale margin, revenue share, and distributor and dealer margins are nearly the same in dollar terms despite a significant shift in TRY terms. Finally, we also see an almost 50% increase in the tax collected in dollar terms compared to last year. How about the other countries?


Table 2: Gasoline Prices from other Countries (USD/lt)

Source: Bloomberg & World Bank

*In the United States, federal and state taxes are collected, and the amount represented is the average value. Rates can change in different states.


As you can see, fuel prices are increasing similarly worldwide. However, in all these countries, the amount of tax collected per liter is declining except for Turkey. While taxes in Italy is reduced by $0,39/lt, in Turkey, they increase by $0,12/lt. In the United States, the government plans to implement a federal tax holiday to reduce the tax.


When you look at the tax rates, you see that Turkey is still the lowest among other countries, and despite increasing the amount of collected tax, it's also reduced in dollar terms compared to last year. In Europe, high fuel taxes have been a policy choice since the 1970 energy crisis to control consumption in a time of crisis and to lower carbon emissions. Now, they are gradually lowering the rates to help consumers. Despite all the protests, when we look at the median income levels, the purchasing power of these countries is significantly higher than Turkish citizens. In this matter, the depreciation of the Turkish Lira against other currencies plays a major role. In Figure 3, you can compare the performance of the Turkish Lira and other emerging currencies against the US Dollar in the last year.


Figure 3: Currency Rate Changes in Emerging Economies (%)

Source: Bloomberg Terminal

As you can see, the Turkish Lira has been the worst-performing currency against the US dollar since last year. USDTRY increased 97%, while other currencies excluding the Russian ruble, since it is a country at war and facing major sanctions, increased around 7%. The difference between our rate and the average results from our policymakers' choices. If we had followed a similar pathway as other emerging economies and had a similar depreciation rate in our currency, USDTRY could have been around 9,00-9,50. Then, we would have been in a position as in Table 3.


Table 3: Impact of Turkish Economy Policies on Diesel Prices

As you can see in the last row, the diesel price could have been 13,22 in May 2022 if Turkey had a better economic policy. When we add all the information we have, we get a result in Table 4.


Table 4: Reasons for Increasing Prices (TRY/lt)

Table 4 shows that a Turkish citizen who bought diesel for her car in May 2022 paid 6,49 TRY/lt for the increasing refinery margins and paid 9,11 TRY/lt because of the Turkish economic policies. Since last year, the burden of buying diesel increased by 15,6 TRY/lt. Sadly, we created the most of it.