REGULATORY INTERVENTION IN THE PETROLEUM INDUSTRY

REGULATORY INTERVENTION IN THE PETROLEUM INDUSTRY

A. Mapping of the Petroleum Industry

In March 2022, the Hellenic Competition Commission (HCC) conducted the first Mapping study on the conditions of competition in the Petroleum Industry.  Mappings allow the HCC to study the competitive conditions in any market or sector of the economy - where required - for the effective exercise of its powers

More information on the above mapping is available here

The petroleum industry includes a very wide range of products.  The HCC’s Mapping selectively focuses on 95 octane unleaded petroldiesel and heating oil, i.e., three prime necessities with low price-inelastic demand. 

The study examines price pass-through in the oil production and distribution chain in the Greek market. Specifically, this mapping examines the phenomenon of asymmetric adjustment of fuel prices in relation to costs (also referred to as the "Rockets & Feathers"- R&F) phenomenon, especially with regard to the existence of asymmetry in price adjustment between the different stages of the petroleum industry (refining, wholesale, retail). 

The study explores the following questions:

  1. Do retail prices adjust more slowly (feathers) to wholesale price decreases and faster (rockets) to price increases? 
  2. Is there any asymmetry in price adjustment between the different stages of petroleum industry (refining, wholesale, retail)? Which stage does the phenomenon of asymmetry originate from?
  3. Is asymmetry (if any) an effect of distortions and lack of competition in the markets under consideration? What causes of asymmetry are identified? 
  4. What is the degree of price pass-through in the production chain?
  5. What are the effects of the phenomenon on consumer surplus?
  6. What measures might help to deal with this phenomenon?

The sample studied consists of daily fuel prices per stage (refinery, wholesale and retail prices) and covers, at this stage, the period from October 2019 to April 2022.

The econometric analysis is based on the use of an appropriate econometric model, namely the Asymmetric Spatial Error Correction Model and examines price pass-through separately for each stage of the value chain (from refining to wholesale and from wholesale to retail). Analysis is conducted with regard to different time periods in order to take account of the impact of the Covid-19 pandemic and the war in Ukraine.

Asymmetry in price adjustments occurs when prices in the downstream market adjust differently to price changes in upstream markets. An example of this phenomenon is when the price of downstream products immediately increases when input price increases (“rockets”) but falls slowly with input price decrease (“feathers”). The phenomenon is very common in the fuel market in certain countries and may be due to a number of different drivers, such as: 

  • The highest retail price as a focal point for gas stations.
  • Possible delays in integrating low prices into fuel supply, mainly due to limited stocks.
  • The existence of asymmetry in consumer information about price developments and fluctuations.
  • Search costs on the consumer side: price increases due to a cost increase will lead consumers to intensify their search for a lower price reducing profit margins and price dispersion. On the other hand, when costs and prices decrease, consumers tend to reduce search leading to higher profit margins and greater price dispersion.
  • Depending on storage capacity, there is an incentive for higher prices when international prices are low. Conversely, in times of high international prices retail prices are automatically adjusted upwards, as storage is not profitable.
  • Areas with locally strong retailers are more likely to have slow price drops.
  • The possible existence of cartels between retailers.
  • The tacit collusion between retailers or undertakings operating at another stage of the value chain.

In the context of the mapping study, the existence of one or more of the above reasons for the presence of an asymmetric adjustment of fuel prices will be examined. Based on the relevant literature, the oligopolistic nature of each local relevant market activates the emergence of price asymmetry. This finding raises questions about the existence of oligopolistic/possible anti-competitive behaviors by undertakings operating in these markets. 

From the very early findings of the study so far, there are significant signs of existence of the asymmetric price adjustment phenomenon in the Greek market at the retail stage (gas stations), as a preliminary analysis of the weekly fuel prices published by the European Commission (Oil Bulletin) confirms the existence of an asymmetry in the pass-through of fuel prices in Greece, which leads to a loss of part of the consumer's surplus, as the consumer pays more than the amount he would actually pay in the absence of this phenomenon.

In April 2022, the DGC sent questionnaires to all undertakings active in the oil industry at all stages of the value chain nationwide, namely the two refining companies and the nine companies with nationwide activity in the oil wholesale. The DGC also drew on retail price data for the products in question from more than 5,000 gas stations nationwide from the data kept by the Centre for Renewable Energy Sources and Saving (CRES).

An in-depth understanding of market operation will enable the HCC to make proposals to the State to further strengthen competition and remove regulatory barriers, contributing in a scientifically thorough manner to the public discussion on policy making aimed at boosting free competition in the petroleum sector. The HCC may also launch a regulatory intervention into this sector under article 11 N 3959/2011, where it finds that there are no conditions of effective competition and deems that the implementation of articles 1, 2 and 5 to 10 is insufficient to create conditions of effective competition.

B. REGULATORY INTERVENTION IN THE PETROLEUM INDUSTRY
Ι. INITIATION OF THE REGULATORY INTERVENTION

On 28 November 2022, the Hellenic Competition Commission (HCC) decided to initiate the procedure stipulated Art. 11 of Law 3959/2011 (regulatory intervention in sectors of the economy) in order to look into the petroleum industry and, in particular, to assess the prevailing market conditions in terms of effective competition in the three production and distribution stages (refining, wholesale, retail) of petroleum products (unleaded petrol, diesel and heating oil) in the Greek market. These are prime basic necessities with low price-inelastic demand.

The initiation of the above regulatory intervention is based on the preliminary findings of the mapping study on the Petroleum industry, launched by HCC Decision on 22.3.2022 (see press release here). The HCC’s Mapping selectively focused on 95 octane unleaded petrol, diesel and heating oil and examined price pass-through in the oil production and distribution chain in the Greek market. Specifically, this mapping examines the phenomenon of asymmetric adjustment of fuel prices in relation to costs (also referred to as the "Rockets & Feathers"- R&F phenomenon), especially with regard to the existence of asymmetry in price adjustment between the three different stages of the petroleum industry (refining, wholesale, retail).  

The HCC, applying national and EU competition rules, has systematically dealt with this sector, issuing a series of Opinions and Regulatory Decisions over the last fifteen years:

  1. The HCC, in the context of its regulatory intervention under Article 5 of former Law 703/77, as it was in force (now Article 11 of Law 3959/2011), fully investigated the petroleum products sector at all stages (refining, wholesale, retail) and proposed, by virtue of its decisions 334/V/2007 and 418/V/2008, the adoption of specific measures by the State to address the structural weaknesses and long-standing problems which hamper the level of competition and have a price-increasing effect in the fuel market. Some of these proposals were gradually adopted by the competent political leadership (e.g., mandatory issue of sales receipts by retailers, access of Independent Gas Stations to the refineries, detailed listing of discounts on invoices, signposting on the closed road axes of Attiki Odos, etc.).
  2. Furthermore, the HCC has issued the Opinion no. 26/VII/2012 regarding the maintenance of prior administrative authorisation in a number of professions in the petroleum industry, based on article 3(2) of Law 3919/2011 "Principle of freedom of profession, abolition of unjustified restrictions on the access to and exercise of professions". 
  3. In addition, the Authority issued “Opinion no. 29/VII/2012 in the context of the provisions of Article 23 of Law 3959/2011, aiming at eliminating restrictions and regulations that create barriers to free competition in the petroleum products sector". This Opinion updated the HCC's two previous regulatory interventions in the petroleum industry, both by identifying regulatory barriers to the effective operation of the petroleum products sector and by identifying restrictions on the access to and exercise of the relevant professions, particularly in light of Article 2 of Law 3919/2011, to the extent that they have not been addressed by state interventions in the meantime. The above Opinion included a total of 31 proposals, which were submitted to the competent Ministries, namely the Ministry of Development, Competitiveness, Infrastructure, Transport and Networks, the Ministry of Finance and, the Ministry of Environment, Energy and Climate Change. Certain of these 31 proposals included in the HCC’s Opinion were not adopted or were partially adopted by the competent Ministries.

The initiation of the above regulatory intervention is based on the preliminary findings of the mapping study on the Petroleum industry, launched by HCC Decision on 22.3.2022 (see press release here). The HCC’s Mapping selectively focused on 95 octane unleaded petrol, diesel and heating oil and examined price pass-through in the oil production and distribution chain in the Greek market. Specifically, this mapping examines the phenomenon of asymmetric adjustment of fuel prices in relation to costs (also referred to as the "Rockets & Feathers"- R&F phenomenon), especially with regard to the existence of asymmetry in price adjustment between the three different stages of the petroleum industry (refining, wholesale, retail).  

The econometric analysis focused on the direct effect of the change in product acquisition costs on prices. The conclusion of the analysis, which was geographically limited to the prefecture of Attica, a market where there is more competitive intensity, shows the existence of asymmetry for all three products in all three stages of the production and distribution chain (refining, marketing, retailing). Further econometric analysis reveals that, regarding 95 octane unleaded petrol and heating oil, there is an asymmetric pass-through to the retail (gas station) prices after a change in the price of wholesalers. Regarding these products, the asymmetry appears simultaneously with the wholesale price change (direct effect) and still exists cumulatively after five days (aggregate pass-through), albeit decreasing. Furthermore, the DG of HCC examined the pricing mechanism for all three products as well as other factors that may be linked to the asymmetry observed.

In respect of the competitive conditions, the following, inter alia, are preliminary observed:

(a) A high degree of concentration in the refining market. A moderate to low degree of concentration in the wholesale market. It is noted that there are approximately 5,000 gas stations operating in the retail market in Greece, however the competition is local, so the level of concentration may vary between regions and should be thoroughly examined.

(b) A significant increase in the turnover and profitability indicators of refineries and wholesalers during the period under consideration.

(c) A prima facie particular increase in the refineries’ profit margin in 2022 (almost doubles compared to 2021), however the figures need to be confirmed by a further investigation per product.

(d) An increase in the refining margin as calculated by the companies despite the individual fluctuations occurring in some cases, however, further investigation for reasons of comparability with other countries is required.

(e) A sharp downward trend in average wholesale prices in all three products under analysis during the 2020 restrictive measures intervals was recorded, with an upward shift from June 2020 onwards, and a strong upward trend from early 2022 onwards, also possibly due to the war in Ukraine.

(f) The average retail prices of all three products recorded a corresponding trend. Similarly, sales prices to the wholesale market (minus any discounts and credits) follow a similar spiral, showing an upward trend from mid-2020 onwards, while a significant price alignment is observed between the two refineries for both 95 octane unleaded petrol and diesel.

It is noted that the main drivers affecting retail prices are refinery prices, taxes and exchange rates. In turn, the price of refined oil products is highly dependent on international Platts prices and other factors. The pricing elements mainly determined by refineries include the fixed consideration for the mandatory maintenance of security stocks, the surcharges and their discount policy. Stocks and their costs are a key factor in pricing, setting prices and determining the profit margin at an accounting and actual level.

By the decision to initiate the regulatory intervention, the Mapping is concluded. In the context of the initiated procedure, the conditions of competition in the relevant markets will be examined in depth, in order to clarify whether the observed asymmetry, and in general the price increase of these products over the last two years, are due to the absence of conditions of effective competition, as well as issues regarding the pricing policy mechanism, the maintenance of security stocks and other potential barriers to entry and development of the market, and maintenance of a high profit margin by the industry firms. In this regard, it is noted that Greece is among the most expensive European countries for liquid fuels in terms of pre-tax prices (regular unleaded petrol and diesel), in conjunction with the existence of an asymmetric adjustment in the formation of final fuel prices (pump prices), especially for 95 octane unleaded petrol and heating oil, and the increase in the profit margin at the various stages of the value chain.

ΙΙ. PUBLICATION OF THE HCC’S PRELIMINARY VIEWS

On 1.8.2024, the HCC published its preliminary views regarding the conditions of competition and invites all interested parties to contribute to the public consultation.

The full text of the HCC’s views is available here.

In the context of the Regulatory intervention, an in-depth study of the petroleum industry in Greece and of the relevant institutional background was carried out. In particular, this study included a thorough analysis of the competitive conditions in the relevant markets and of the structure of the petroleum product market in all stages of the production and distribution chain (refining, marketing, retailing) and sought to identify any barriers to market entry and/or development. Furthermore, a relevant analysis was carried out on the evolution of demand, the prices of the three products (95 octane unleaded petrol, diesel and heating oil) over the period 2019-2022, as well as  on the refining or crack spread, namely the difference between the purchase price of crude oil (input) and the selling price of final refined product (output). The development of trading and retail prices was then presented, as well as the corresponding retail margin for the same period as above. Subsequently, an analysis of activity, trade flows and efficiency of the refining and marketing companies over the period 2019-2022 was carried out both at a company level overall and with regard to each product. The aim of this assessment is, on the one hand, to look into the supply chain profits for each product as well as on the whole range of their activity and, on the other hand, to assess the increase in the companies’ revenues and efficiency in relation to the domestic sales of the three products under consideration or to other factors.

Furthermore, the study examined price pass-through from the Platts price to the refining price for each product, from the refining price to the wholesale price at the territory level, first by extending the pass-through assessment scope and the asymmetry check that was analyzed in the Mapping context, both temporally and geographically (including, in addition to the Prefecture of Attica, the Prefectures of Thessaloniki, Heraklion and Achaia), i.e. the most populous prefectures of Greece. All the above were examined together with the analysis of issues regarding the mechanism of pricing policy and the parameters shaping it, emergency stock requirements, in conjunction with trade flows (imports-exports) in the individual stages of the production and distribution chain and the availability of storage facilities, as well as relevant utilization processes. Finally, the operating efficiency and profit margins of the companies active in the relevant markets were analyzed.

The refining stage shows a prevalence of duopoly conditions, with a high degree of concentration. The price determinants for domestic sales of each product (in particular Platts price, tax and other charges and US$/Euro exchange rate) are common to both companies. The key-role seems to lie with the price of the Platts MED index by oil product. The analysis of the refining prices revealed an alignment (with marginal price differences between the two companies in the fourth to fifth decimal) and a parallel evolution of prices. Furthermore, in both periods under consideration, refining margins increased, even though there are opposite trends in the movement of crude oil and end products (gasoline and diesel) prices between the two periods of reference. Despite the increased refining margin resulting from the first shock, refining companies did not show operating profits throughout 2020, which is largely a result of the limited demand, due to the pandemic, and, by extension, of the limited production of end products by refining companies, in relation to their high fixed production costs. On the contrary, the increased refining margin of the second shock led to significant operating profits for refining companies, as it was accompanied by a relatively increased demand (compared to the 2020 fiscal year) and, by extension, a relatively increased production from refining companies, with price increases over time. The companies’ relative extroversion is also taken into account in this analysis, as they carry out a significant part of their sales in foreign countries, however, regarding the products under consideration, in general, a higher revenue per unit from domestic sales is obtained for each company, compared to the corresponding average revenue of their exports.

The installed production capacity, which exceeds the needs of the domestic market, combined with the downsizing of the industry (worldwide), over time act as an entry barrier to new entrants. At the same time, there are also several other barriers to entry, such as high capital requirements and sunk costs for the development of the necessary production facilities, unforeseeable profit margins characterised by very high volatility, future prospects of further narrowing the market in question at international level, as well as domestic institutional factors, such as the established lengthy and demanding licensing procedures and the obligation to maintain emergency stock.  

Imports do not appear to exert significant competitive pressure on refiners. It would appear prima facie that the need to maintain emergency stocks may create barriers to imports for independent traders. Companies meet their needs through (co-)storage and service contracts, which could reduce the intensity of competition between them or create bottlenecks, especially in island regions of the country. Imports could provide trading companies with alternative sources of supply, while exerting competitive pressure on refiners. The absence of imports combined with restrictions on storage facilities and increased stocking costs constitute barriers to entry/expansion that impede effective competition.

The observed asymmetric pass-through (for diesel in the first period and for unleaded 95 gasoline and diesel in the second period, where Platts index price increases are passed on more to gasoline and diesel refinery sales prices than the respective reductions), combined with refiners' high profit margins and the choice of specific pricing factors and the extremely low competitive pressure due to limited imports, confirm the ability of refiners to profitably increase their prices without being appreciably affected by the actions of their customers or be constrained by potential competitors. In particular, considering the pricing factors of trading companies from refiners, it becomes clear that the latter hedge at least a significant part of their risks (such as exchange rate volatility and crude oil purchase price/cost volatility,) and pass it on to their customers, which have no alternative source of supply. It is noted that refining companies generate more revenue from sales in the domestic market than from exports.

At the wholesale stage, the market is characterised by a moderate to low degree of concentration, where active companies seek to strengthen their competitiveness through the promotion of alternative differentiated products, service provision as well as the general exploitation of their brand. Customers (fuel retail stations) do not make direct purchases from refineries, nor imports, consequently they have no alternative sources of supply. Therefore, the bargaining power lies with wholesalers, which in turn are constrained by the lack of alternative sources of supply at the refining stage. Barriers to entry include high degree of vertical integration in combination with economies of scale and scope, shrinking of the small Greek market, intense delinquency, difficulties in importing petroleum products by trading companies, due to the existing emergency stock requirements, the restrictions linked to storage facilities licensing. Finally, it is noted that trading companies’ profitability in terms of gross profits shows a limited range, with relatively slight variations over time and marginally positive operating profit margins. 

The difficulty in finding an alternative source of supply through imports results in the inability of trading companies to exert pressure on refiners and thus in the ability of the latter to sell their products at increased prices, which constitutes a structural barrier to the entry or expansion of the refiners’ competitors, or even to exerting pressure on behalf of these customers. Therefore, the inability to import combined with restrictions on the licensing of storage facilities, but also the increased costs of emergency stockholding, are factors that have restrictive effects on competition. Regarding storage facilities for the three products considered, it is noted that there are geographical areas within the domestic market where only one company maintains a storage facility. This fact can make fuel storage particularly difficult in insular Greece. In some cases, co-storage and pooling contracts can resolve storage limitation issues, however it is observed that some of the co-storage contracts include exclusivity agreements which may, in certain circumstances, create conditions of non-effective competition, as they limit the access of interested third parties to storage facilities, which is essential to their further business activity, in particular in insular or remote regions where storage facilities are, in any event, limited in number. 

At the retail stage, 6,117 gas stations are active, and 5,825 of them are branded while the rest of them operate as independent gas stations. Barriers to entry at the level of retail supply include the amount of investment needed to set up a gas station, low profit margins and delinquency (fuel adulteration). Also At the retail stage, respectively, imports could constitute alternative sources of supply for trading companies, exerting competitive pressure on refining companies. 

The absence of imports combined with storage facilities restrictions and increased stockholding costs constitute barriers to entry/expansion that limit effective competition.

The full text with the HCC’s views published for public consultation is available here.

Any interested person can participate in the public consultation, regardless of any claim of legitimate interest. The views of a legal entity participating in the consultation can be submitted by its legal representative. All comments and opinions of those interested in participating in the consultation and sharing any information they have that could be useful for shaping the Competition Commission's decision are welcome.

The above text will be open to public consultation until 15.10.2024.

Those interested, are invited to submit their comments in writing and by name electronically (in an editable format) to This email address is being protected from spambots. You need JavaScript enabled to view it., by that date.

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