The risk of a prolonged oil crisis, high fuel prices and the growing budget deficit are putting the Bulgarian economy in serious jeopardy. The ongoing tension around the Strait of Hormuz could keep oil prices high for months to come, and the effect is already being felt both in fuel and inflation. What are the problems with competition in the fuel market, the state of the budget and the necessary measures that the state must take… Georgi Angelov, senior economist at the "Open Society" Institute, speaks to FACTI.
- Mr. Angelov, you warn that the crisis around the Strait of Hormuz could keep oil prices high for months. How serious a risk is this for the Bulgarian economy and people's pockets?
- The longer the closure of the Strait of Hormuz continues, the worse the scenarios will become. A number of analysts point out that we are not yet feeling the full effect of the oil shock, because the oil market had large reserves of oil and fuels accumulated over the past 1-2 years. These reserves are expected to reach a critical level by the summer, and then the risk is that oil prices will reach astronomical levels. Let's not forget that during the first oil shock in 1973, oil prices jumped by 300%. An even worse scenario is if the US banned oil exports - when such rumors were heard a month and a half ago, an immediate increase in oil prices was felt in Asia and Europe.
Of course, there is also a good scenario - opening the strait and resuming oil supplies. But even in the best case scenario, it will take between 3 and 6 months to reach normalization. The positive thing from the last few days is the erosion of the OPEC oil cartel after the United Arab Emirates left. The Emirates have more oil than the US and Russia, but OPEC does not allow them to increase production - after leaving OPEC, the Emirates will increase oil production and it is likely to lead to a price war with Saudi Arabia. In such a scenario, the situation will normalize faster. However, all this will happen only after the opening of the Strait of Hormuz.
- In Bulgaria, there is often a feeling that fuel prices increase immediately, but they decrease very slowly. Is there a real problem with competition and pricing in the fuel market?
- Obviously, there is a problem, even the Competition Protection Commission has imposed record fines of over 130 million euros on the refinery in the last few years. The justification of the CPC is precisely for abuse of dominant position and for preventing competitors from accessing tax warehouses for fuels. But fines do not solve the structural problem - according to data from the Ministry of Finance, we have a practical monopoly on tax warehouses, because "Lukoil" owns over 90% of the gasoline warehouses and over 80% of the diesel warehouses. Negotiations are currently underway for the sale of "Lukoil" assets outside of Russia - in this procedure, the CPC and the Bulgarian state must set a requirement that the new owner part with at least half of the tax warehouses in order to eliminate the monopoly. Until this happens, we will have problems with the fuel market, even in normal times.
- You say that relatively cheap oil is entering our country, but this is not felt enough at the pumps. Should the state intervene more actively and how?
- There is a lot of oil supply in our region. Kazakhstan exports almost all of its oil through the Black Sea, Azerbaijan exports mainly through Turkey - the Mediterranean port of Ceyhan. Now, due to the closure of the Strait of Hormuz, Iraq has also launched the oil pipeline to Ceyhan, so Iraqi oil is now available in the region. The Iraqis are working hard to repair old oil pipelines to increase exports through Ceyhan. Saudi Arabia also cannot export through Hormuz and has launched an oil pipeline to the Red Sea, which is also close to our region (via the Suez Canal). So, paradoxically, there are more sources of oil right in our region, and accordingly at better prices, because there are no high transportation costs, which, for example, drastically raise the price of oil in Asia.
For me, the state must necessarily shed light on pricing throughout the fuel chain – starting with the refinery. If there are higher than normal profits, measures can be taken – whether through taxation, as in the previous energy crisis, or through regulation, this is a matter of technique. The other open issue is the ban on the export of jet fuel. Currently, jet fuel is sold at astronomical prices in Europe and exports can be very profitable for the refinery – the export of jet fuel can be freed up on the condition that these profits reduce gasoline prices in the country.
- Is it possible that a new surge in oil prices will lead to a new wave of inflation – not only in fuels, but also in food, transport and services?
- We can already see the wave and unfortunately oil is not the only problem. The domestic environment also fuels inflation. The budget deficit is 75% higher than the same period last year, which is pouring more and more money into the market. Bank credit for households is also growing at a high rate, over 24% on an annual basis – this is also pouring into consumption. These processes add fuel to the fire and increase inflationary pressure. The indebtedness of both the state and households creates tension, which inevitably spills out somewhere – whether in property prices, or in the prices of services or food, it is inevitable. The pouring of money will always spill out somewhere in the form of inflation. Therefore, it is very important to limit this process as soon as possible.
- In your opinion, is the state budget prepared for a longer energy and price crisis, or are the risks for the deficit growing?
- No, the budget is not prepared – the state does not have a budget at all and has been on an extended budget for five months now. Since no one knows when the oil crisis will end, it is important that the new budget foresees sufficient buffer mechanisms to be able to react to the dynamic situation.
- You recently warned that the budget deficit is growing at a high rate. Where is the biggest problem - excessive spending, lack of reforms or weak control over spending?
- It is difficult to say yet, because often when a new government comes in, it turns out that there are unpaid invoices or signed contracts that need to be paid. The most obvious problem is the lack of payments from the recovery plan - if reforms are not put into motion, we could lose billions, which will open a huge hole in the budget. Other problems that existed in recent years under weak and unstable governments were the lack of reforms and uncontrolled spending. The new government does not have such a problem - it has a majority, so it can safely adopt a more reasonable budget and start reforms.
- If oil prices remain high until the end of the year, what measures should the state take - compensation for people, lower excise taxes or stricter budget discipline?
- A mistake was made in the energy crisis of 4-5 years ago, when compensation was distributed to the poor - both to those who suffered from the crisis and to those who benefited from the crisis. This was extremely expensive and ineffective. It was claimed that by distributing compensation to business, it would not raise prices, but the opposite happened - both compensation was received and prices rose.
The correct approach is to act purposefully - to support those who are severely affected. For example, industries that have large profits or people with high incomes do not need to receive assistance. In order to see who has suffered, one must rely on real data, not on statements and protests in the media - the NRA can collect such data and, based on them, assess who exactly benefits from the crisis, who does not feel it and who is really severely affected.
- Do you see a risk that Bulgaria will enter a situation in which there are simultaneously high prices, weak growth and tension around the budget - that is, a scenario close to stagflation?
- In the event of an oil shock, stagflation is a very significant risk, especially for oil-importing countries. It is no coincidence that the word stagflation itself became popular during the first oil shocks in the 1970s, because that is exactly when a long period of high inflation and weak growth was observed. The positive thing about the current crisis - unlike 2022 - is that electricity prices on European exchanges have not increased much, they even fall with the arrival of spring. With reasonable measures, this situation can be maintained, which will help industry and households to get through this crisis more easily. But there will be challenges, especially in winter.
- We heard a request from Galab Donev from “Progressive Bulgaria“ that a loan will be taken out. Is this inevitable?
- Nothing is inevitable, but the more important question is how much? The previous government proposed over 10 billion euros in new debt for 2026 and fortunately the protests did not allow this budget to be adopted with levels of indebtedness. It would be a mistake for the new government to bet on such huge indebtedness, it will get us into big trouble. On the contrary, it should significantly cut new debts – at least by half this year and even more next year. This would be an important step towards stabilizing finances.