The government should not impose a price cap on fuel; instead, it is necessary to consider adjusting the excise tax, economists from banks told the LETA agency.
The chief economist of Citadele Bank, Karlis Purgailis, told the LETA agency that a price cap on fuel may temporarily reduce pressure; however, a much more effective approach for Latvia would be a flexible adjustment of the excise tax.
He explained that any government intervention in free market factors, including price regulation, typically creates more risks and long-term negative effects than short-term benefits, so such actions are not effective in the long run.
"Fuel traders cannot become compensators for rising prices," said Purgailis, adding that 25% of the total retail price of diesel fuel and 32% of gasoline consists of excise tax. The value-added tax, which is 17% of the total retail price, also plays a significant role. Both of these components are under direct government control, and short-term changes can be made to partially offset the sharp rise in fuel prices.
The chief economist of Luminor Bank, Peteris Straujinsh, also told the LETA agency that the government should not impose a price cap on fuel for several complementary reasons.
He explained that the government should not create the impression that it can protect society from all unpleasant events or surprises under any circumstances.
"The competition to throw money around during the pandemic should remain an exception. Now it is necessary to deal with the consequences of the pandemic period's rising public debt," stated Straujinsh.
The economist noted that the short-term rise in fuel prices is a "very good vaccination against inertia of thought." There is currently great concern that fuel traders are making extra cents from the chaos caused by fluctuations in raw material prices; however, consumers themselves have the opportunity to significantly reduce their energy costs for transportation by implementing the latest transportation technologies in their lives.
Straujinsh pointed out that fuel prices have risen compared to the beginning of this year, which was the lowest level in several years. However, fuel prices relative to income are still at one of the historically lowest levels.
"When in 2022 fuel prices exceeded two euros per liter, incomes in Latvia were about two-thirds of the level in 2026. When in 2012–2013 fuel prices were about one lat or 1.4 euros, incomes were significantly less than half of the current level," indicated Straujinsh.
As previously reported, in the largest networks of gas stations in Latvia, according to data collected by the LETA agency, the average price of diesel fuel increased by about 20% after the escalation of the conflict in the Middle East, while the price of 95-octane gasoline rose by 5–7%.
With the current geopolitical situation maintained, companies forecast further increases in fuel prices in the coming weeks.
LETA also reported that oil prices have risen due to the war between the USA and Iran.
Foreign economists warn that consumers and businesses worldwide may face rising fuel prices over the next few weeks or even months, even if this war ends quickly, as oil suppliers will find it difficult to fully restore operations quickly due to damaged plants and logistics networks, as well as increased risks in transporting goods.
