Energy price rises can cause government’s to fall as Kazakhstan shows

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by Shaun Richards

We have a New Year and we find we have a new subject albeit it comes with a familiar theme for us. I may have mentioned Kazakhstan before via its role as a fossil fuel provider but have not written an article on it.However events there have featured a theme of these times and sent out quite a signal to governments around the world. Let us start with this from eurasianet.

But they began with something very concrete: the price of liquified petroleum gas, or LPG, the fuel that many use to power their cars.

So we have something of a curiosity in the use of LPG for cars but let us know look at what happened. Back to eurasianet.

It all began with the phased transition to electronic trading for LPG that began in January 2019 and concluded on the first day of this year. The idea was to gradually end the subsidizing of prices for domestic fuel consumers and to allow the market to dictate prices instead. This means that almost all trade in LPG now happens over online trading platforms, with the exception of sales to industrial consumers in the petrochemical sector and a few other cases.

So we see a familiar element in that a government has interfered in a market via the use of fuel price subsidies but then become a believer in a free market. They are forever dipping in and out of such things with my country the UK having headed the other way via the price cap for domestic energy.Both are in a bit of a mess because the situation of the price rises we have seen and before we even get to the political consequences Kazakhstan has made quite a mess as it is a large producer so the problem has been rather self-inflicted.

This policy has, predictably enough, led to a particularly precipitous rise in costs where demand for this fuel is high. And that has been the case in Kazakhstan’s western Mangystau region. In a matter of days, prices for LPG at gas stations doubled from 60 tenge ($0.14) to 120 tenge ($0.28) per liter. The government estimates that 70-90 percent of vehicles in the region run on LPG. That is a higher proportion than in many other parts of Kazakhstan.

Why LPG Cars?

So prices were pushed much higher which rather tripped over the issue of why people had switched to LPG for their cars in the first place. According to gazeo.com this started a few years back.

It did and Kazakhstan is one such country – autogas sales increased there by a staggering 43% in 2016. Motorists used over 450 thousand tonnes of the alternative fuel for their cars.

They also explained why this happened?

The tendency should continue at a comparable rate in the following years, since LPG is 2,5 times cheaper than low-octane petrol and 3 times cheaper than high-octane one. And mind you, autogas has all the properties of the latter, so converting a car running on low-octane “juice” is like switching to its high-octane counterpart, but at a fraction of the original price.

As an aside this returns me to the days of 4 star and 5 star petrol in the UK where the latter usually had a badge of “super” or similar and was supposed to deliver performance benefits. But the issue here is that people switched to get high-octane or five-star performance for what Middle of the Road described as this.

Ooh wee, chirpy chirpy cheep cheep
Chirpy chirpy cheep cheep chirp

Thus we see the nub of the problem as the car drivers of Kazakhstan did their own arbitrage play. For the ordinary person to play the spreads need to be wide and they were with the alternative price some 3 times higher. But by wading in the government ended that and left them with the costs of conversion.

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Why did the government act?

We can now see a real world example of what you would expect after reading an economics textbook. Very low prices led to arbitrage by traders.

Another goal of the reform was to tackle illegal trading in LPG. Black-market operators are said to covertly export the commodity to countries where prices are significantly higher than in Kazakhstan. The government has produced data showing that the average retail price for LPG stands at 110 tenge ($0.25) per liter in Kazakhstan. That is two-thirds as much as Russians pay and around half the price LPG sells for in Kyrgyzstan. ( eurasianet )

So there was quite a margin available to pay transport costs.

The next issue is that if the price falls below the cost of production why produce it?

 Prior to the transition to online trading, LPG was generally sold at a loss for producers, because prices for domestic consumers were regulated by the state and set at a rate below the cost of producing the fuel. In those conditions, there was little reason to produce LPG, which in turn generated shortages. ( eurasianet )

In fact the shortages were getting worse.

Demand for LPG in 2021 rose by 14 percent year on year, up to 1.6 million tons – even as production remained flat.

Central Bank

The Nationalbank of Kazakhstan was presented with a problem by all of this.

The medium-term inflation target is set at 3-4%. In order to ensure balanced economic development, the National Bank strives to gradually reduce inflation to this level. For this, the targets have been set as follows:

  • for 2021-2022 – 4-6%;
  • for 2023-2024 – 4-5%;
  • from 2025 – 3-4%.

So it has what it calls an inflation corridor. But it is well outside of it according to the Bureau of National Statistics.

Since the beginning of the year December 2021 compared with December 2020 prices and tariffs for consumer goods and services have increased by 8.4% including food products – by 9.9% non-food products – by 8.5% paid services – by 6.5%

Of course many central banks face similar situations at the moment but interest-rates here are well above what we have come to consider as normal.

on December 6, 2021, the Monetary Policy Committee of the National Bank of the Republic of Kazakhstan decided to leave the base rate unchanged at 9.75% per annum with a
interest rate band of +/- 1.0 p.p.

The price rises will have put the inflation numbers under more pressure and thus the central bank as it was predicting a fall in 2022.

By the end of 2022, in the context of continued effective implementation of the Anti-Inflationary Response Package and the release of a high base in 2021, annual inflation will slow down to 6.0-6.5%.

Comment

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The situation rapidly got out of hand and reminded of a song by Joan Armatrading.

Don’t you know
Talking about a revolution?
It sounds like a whisper

Reuters have told us about this consequence.

President Kassym-Jomart Tokayev accepted the government’s resignation on Wednesday.

So a signal has gone out that a consequence of the energy price rises and inflation is that government’s can fall becuse of it. That will echo around a few capitals especially as it was in the usually stable Kazakhstan. There is a clear irony in that a country with plenty of energy resources managed to get itself into such a mess.

 The country is the largest oil producer in Central Asia, with the 12th-highest proven crude oil reserves in the world……Kazakhstan is also a major energy exporter. In 2018, it was the world’s 9th-largest exporter of coal, 9th of crude oil and 12th of natural gas. ( IEA )

That will send a chill down the spine of government’s in energy importers who are more vulnerable.

The price rises have now been reversed but it does not seem to be calming things much so far.

Geographically it poses another question in a region which has plenty of troubles. We have looked at Turkey quite a bit recently

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