Bank of Latvia economists: Diesel prices react faster to increases than decreases
A study by Bank of Latvia economists shows a short-term asymmetry in diesel fuel prices at Latvian gas stations – prices rise faster than they fall, but the transmission is complete over 25-30 working days. Retail margins have also increased in recent years.
Economists at the Bank of Latvia have conducted a detailed analysis of diesel fuel pricing, finding that pump prices respond quickly and fully to changes in wholesale prices, but with a slight short-term asymmetry: prices increase faster than they decrease.
The study shows that when European gas oil prices rise by 10 euro cents per litre, diesel prices at Latvian stations increase by the same amount within 25 to 30 working days. Half of the effect is seen within the first five to six days, meaning prices go up by five cents within a week. This asymmetry is temporary and disappears completely after 25–30 days. The phenomenon is known as "rockets and feathers" effect – prices shoot up like rockets but fall slowly like feathers.
The asymmetry is a relatively new trend, more pronounced in data after 2017. One possible explanation is that the Latvian fuel market reached saturation about ten years ago, with volumes no longer growing. This forces stations to compete for market share or adjust pricing strategies to boost profits.
The study also found that diesel retail margins have increased. Over the previous ten years, margins ranged from 9 to 13 euro cents per litre, but have risen to 15–20 cents in the last four years. This trend applies to major operators such as Neste, Circle K, Virši, and Viada, and is also observed in neighboring countries and major Northwest European states. Latvia's margin is neither the largest nor the fastest-growing in the region.
However, economists caution that higher margins and asymmetry do not necessarily translate into greater profits for stations. Factors influencing these trends include demand fluctuations, price differentiation, higher biodiesel costs, the EU ban on Russian oil product imports since February 2023, and wage growth (since before the pandemic, average and minimum wages in Latvia have risen by 70% and 80%, respectively). The sharp oil price swings following Russia's invasion of Ukraine have also contributed.
