The issuance of the new directive for determining oil feedstock prices and products has once again escalated the long-standing dispute between the government and the country's refining industry. Government decision-makers, citing national ownership of oil resources, believe that profits resulting from the spike in crack spread should return to the public treasury, while market participants and refinery managers, through protest letters, warn that this contractionary approach will not only halt vital gasoline quality improvement projects but will also directly harm small shareholders and tens of millions of justice share holders.
New Challenges in the Refining Industry
After extensive negotiations regarding the settlement process between refineries and the government, these new regulations have become one of the most debated topics among industry participants. A decision that has created a thin line between "preserving the interests of the national treasury" and "maintaining investment incentives in the oil industry."
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The main criticism from refining industry participants, which has also been reflected in a letter to the President, concerns the formula based on which, whenever global prices improve and the price gap between products and crude oil (crack spread) increases, the feedstock price also rises accordingly to increase the government's share. Critics and market experts argue that this formula represents a one-sided approach; as during periods of falling global prices and declining profit margins, the government does not provide any support to compensate for refinery losses.
Economic and Social Consequences
From the perspective of stock market participants, imposing this rule at a time when refining companies constitute a large portion of the justice share portfolio and pension funds targets the fragile confidence of investors in the capital market and reduces the annual profits of small shareholders. The Isfahan (Shana), Tehran (Shatran), Tabriz (Shabriz), and Bandar Abbas (Shabandar) refineries are traded in the capital market, and a high percentage of their shares have been allocated to various segments of the population in the form of justice shares. Any reduction in profits or negative shocks to these companies directly lowers the asset value of small shareholders and retirees.
Moreover, refineries argue that their current profits should be spent on executing billion-dollar projects to reduce the production of fuel oil (mazut) and produce Euro 5 gasoline, and that a decrease in liquidity will directly deepen the fuel imbalance in the country.
On the other hand, defenders of this directive within the Planning and Budget Organization and the economic decision-making body of the government hold a different view. From the government's perspective, crude oil is part of the public wealth of all Iranian people. The argument of the designers of this directive is that the sudden increase in crack spread in international markets is often the result of geopolitical fluctuations or domestic crude oil rents and should not be confined as net operating profit on the balance sheets of a few companies, but rather a portion of this surplus income should return to the treasury to cover public expenses and heavy energy subsidies.
A review of both viewpoints indicates that the current challenge is a collision of two undeniable priorities: on one hand, the government's concern for securing public revenues in a budget deficit situation, and on the other hand, the concern for maintaining investment security, the motivation for developing the refining industry, and protecting the rights of small shareholders.
Experts believe that overcoming this deadlock requires creating a win-win and predictable formula; a formula in which no economic entity is driven into losses with every global fluctuation, and the public interests of the country are not overlooked due to the rent from national resources.
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