Whitepaper - Thought Leadership Article - Measures to Mitigate Rising Fuel Prices (1)

1. Market Research Services WHITEPAPER Measures to Mitigate Rising Fuel Prices

2. Measures to Mitigate Rising Fuel Prices Measures to protect drivers from rising fuel prices As the war in Ukraine has witnessed over a month now, its implications on global macro drivers are becoming clearer and more alarming. A large portion of the strain is from the surging and more volatile oil prices, as Russia produces ~10% of the world’s oil. Retail gasoline and diesel prices had reached an all-time high in many countries across the world last week, which led various governments to consider pumping up subsidies or cutting down on taxes to protect consumers from the financial strain. The steps reflect the governments’ concerns about the current energy increase, which has been fueled by a rebound in fuel consumption ever since the height of the COVID-19 pandemic and supply difficulties in the aftermath of Russia’s invasion of Ukraine. If prices continue to rise, as many economists predict, they will stifle economic growth, induce decreased consumption, and, in some situations even spark political instability. Increasing fuel prices have sparked deadly riots in nations such as Kazakhstan, Iran, and Zimbabwe in the past. To overcome this, the European Union (EU) has proposed to take joint action, to its member states, to achieve more affordable, secure, and sustainable energy. To understand this in a better way, below is a detailed analysis of the current situation of prices, supply, and storage of energy in Europe, and the EU’s reliance on energy import from Russia. Toward the end, there are some measures proposed by the European Commission to reduce/eliminate the dependency of its member states on Russia’s oil import and mitigate high prices. Finally, there is a list of initiatives taken by different countries across the globe to protect their consumers from the rising fuel price inflation. Europe: current situation on energy prices, supply, and storage Currently, energy prices are at their peak and the situation seems likely to remain volatile. Prior to the Russian invasion of Ukraine, wholesale gas prices were up ~200% y/y in February 2022; a similar trend was observed in wholesale electricity prices. A strong global demand for gas in the post-pandemic era along with Russia’s invasion of Ukraine has fueled the energy crisis even further. Russia being the main supplier for Europe along with rising uncertainty around the war has resulted in increased instability that drove up volatility in prices. The medium term outlook for energy prices remains on a higher side than the average for some time in the past. The current gas storage filling level across Europe is just under 30%. However, storage in the EU would be sufficient until winter even without Russian support as all member states have their contingency plans ready as required by the Gas Security of Supply Regulation to ensure guaranteed supply. Reliance will be on a meshed network with pipeline interconnectors between member states and connected LNG terminals. All the regions will now have access to over one source of gas. In addition, Europe is trying to diversify energy supply routes and sources. The Southern Gas Corridor, which transports gas from Azerbaijan, is already operational and collaborating with several countries, including Norway, Qatar, Japan, South Korea, and the US. In 2022, import of LNG into the EU has significantly increased to 10 billion cubic meters (bcm) in January, the highest-ever amount, and expected to increase further. (EU has the potential to import additional 50bcm of LNG on a yearly basis.) 2

3. Measures to Mitigate Rising Fuel Prices EU’s reliance on energy import from Russia For the past five years, the EU has relied on fossil fuel imports (gas, oil, and coal) to meet its energy demands, accounting for 57-60% of total energy consumption. Despite rising domestic production of renewable energy sources in recent years, the EU remains reliant on imports for gas (90% of consumption), oil (97%) and hard coal (70%) because of the declining production of EU coal, lignite, and gas. For the gas sector, Russia provided ~45% of the EU’s total gas import in 2021 (average was ~40%), while other suppliers were Norway (23%), Algeria (12%), the US (6%), and Qatar (5%). For crude oil, Russia was the largest supplier with ~27% followed by Norway (8%), Kazakhstan (8%), and the US (8%). Similarly, for hard coal sector, Russia remained the leading supplier with ~46% of EU’s import, others being the US (15%) and Australia (13%). Measures proposed by the European Commission (EC) to member states to mitigate high prices The key measures proposed by the EC are energy subsidies and vouchers, tax reductions, and measures to avoid energy disconnections. 25 member states have already introduced these special measures that would benefit ~71m household customers and several million SMEs. According to the European Central Bank (ECB), energy price shock will reduce the GDP growth by 0.5ppts in 2022. In the current exceptional scenario, the EC had confirmed that member states can set regulated prices and consider temporary tax measures on windfall profit that would ultimately be redistributed to consumers. There is a possibility to use increased emission trading revenues to mitigate pressure on households. In addition, EC has adopted a new Temporary Crisis Framework as state aid measures to provide short-term support to companies with high energy exposure that could reduce the impact of price volatility in mid- to long-term. Measures proposed for next winter The EC has proposed to achieve higher filling of gas storage levels to be prepared by winter of 2022, for which the Commission will make a legislative proposal on minimum gas storage, by April, which would establish a 90% filling target by October 1, each year. It is also proposed to give full tariff rebates at storage points. Until EU legislation is in place, the EC has urged member states to take necessary measures to refill storage ahead of current winter season. A proper mechanism to ensure a fair allocation of security of supply costs has also been proposed by the EC to those members who don’t have storage capacities available in their territory. 3

4. Measures to Mitigate Rising Fuel Prices Proposal to eliminate reliance on Russian gas The EU has proposed REPowerEU, to phase out the dependence on fossil fuel from Russia well before 2030, with a focus on increasing the resilience of its energy system, boosting the use of biomethane and renewable hydrogen, and diversifying gas supply sources through higher LNG and pipeline imports from non-Russian suppliers including the US, Norway, Qatar, Azerbaijan, Algeria, Egypt, Korea, Japan, Nigeria, Turkey, and Israel. It is estimated that by the end of 2022, the plan could result in lowering the EU’s gas demand by volumes ~67% of Russian gas imports from 2021. Also, the REPowerEU aims for 36bcm of biomethane production by 2030 using sustainable biomass sources such as agriculture wastes and residues. In addition, there is a plan to create a Hydrogen Accelerator to develop integrated infrastructure, storage facilities, and port capacities. It is estimated that an additional 15mt (million tons) of renewable hydrogen can replace 25-50bcm per year of imported gas from Russia by 2030. This plan also highlights the importance of accelerated roll-out of solar, wind, and heat pumps. EU Gas Imports from Russia 160 120 80 bcm 40 0 2021 Supply Gas Storage Demand Within a Year Domestic Production & Pipline Imports LNG Improts Fill Storage to 90% Existing Policies Heat Pumps, Energy Efficiency & Temperature Control Low Emission Generation Source: International Energy Agency Summary • Do not sign any new gas supply contract with Russia that will help in diversification. • Replace Russian suppliers with alternate sources that will improve non-Russian gas supply by ~30bcm within a year. • Introduction of minimum gas storage obligation to enhance resilience of gas system by winter. • Deploy new wind and solar projects that will help in reducing gas use by 6bcm within a year. • Maximize power generation from bioenergy and nuclear energy to reduce gas use by 13bcm in a year. • Introduce temporary tax measures on windfall profits to shelter vulnerable consumers from higher prices. This would also cut energy bills even in case of high gas prices. • Accelerate replacement of gas boilers with heat pumps to reduce gas use by additional 2bcm in a year. • Apply energy efficiency improvements in buildings and industry to reduce gas use by ~2bcm in a year. • Motivate temporary thermostat reduction of 1 degree Celsius by consumers to reduce gas use by 10bcm in a year. • Implement diversification and decarbonization of sources of power system to loosen the links between gas supply and Europe’s electricity security. 4

5. Measures to Mitigate Rising Fuel Prices Country-wise reaction Apart from these long-term changes, governments of different countries are taking/planning some measures: • The US had declined to intervene directly at retail pumps with tax holidays or direct subsidies. • Ireland announced to cut the excise duty on petrol and diesel until the end of August. 20% cut in excise duty per liter of petrol and 15% of diesel. Also, a cut of 2% per liter of green diesel is approved. Total cost would be €320m. • Portugal announced to lower the special tax levied on fuels. • France’s President, a month before the presidential elections, said that the government is going to announce measures to deal with rising prices and clarified that the government had already spent €20bn a year to moderate gasoline and power costs. The government is also planning to introduce 15 cents-a-liter discount on fuel prices from April 1, 2022. Also, €400m immediate aid has been allocated to haulers. • Brazil is planning a new gasoline and diesel subsidy program to help consumers with rising fuel prices. • The Czech government plans to scrap mandatory bending of bio-components into fuel and is planning to abolish road tax to counter rising prices. • The UK government had announced £12bn in support and freeze on the fuel duty for the 12th year in a row. This week, the UK announced a cut in fuel duty of 5p a liter for the next 12 months, the largest cut to fuel duty rates the UK has ever made. • Germany’s federal cabinet announced a relief package on March 24. The energy tax on fuel is to be reduced to the minimum rate translating to a reduction of 14 cents per liter than current cost, according to Network of European Railways. • Spain announced €500m aid to the transport industry on March 21. The impact on current fuel prices is not yet clear. • Belgium cut the excise duties on diesel and petrol by 17.5 cents per liter on March 15. Revisions will be made in the middle of June. • The Netherlands reduced the excise duties on petrol and diesel by 21% with effect from April 1. This would translate into a reduction of 17 cents per liter for petrol and 11 cents for diesel. • Italy, on March 23, reduced the price of fuel duty by 25 cents per liter until the end of April. Also, €500m state funding has been announced. • Poland, as part of its anti-inflation shield, had cut VAT on fuel to zero from February 1. This was done despite the claims by the UK Conservative politicians that it is impossible to do so. • Slovenia introduced a month-long cap on fuel prices on March 15 and the maximum price of diesel was set at €1.541 per liter. • Hungary, in November 2021, introduced a cap on fuel prices with maximum price for both petrol and diesel set at 480 Hungarian forints. However, the rule was modified on March 10, and the price cap was not applicable to vehicles over 3.5 tons if registered abroad and vehicles over 7.5 tons if registered in Hungary. • Croatia first introduced a one-month fuel price cap in October 2021 and the current cap rates are 11.37 kuna for Eurosuper 95 per liter and 11.29 kuna for Eurodizel. • Romania reduced the excise duty on fuel by 50% in February to keep the diesel prices at pump to 7 lei per liter but now the government is again in pressure to take additional steps. • Sweden announced a reduction of 12 cents per liter on the tax applied to diesel and petrol from June until October 2022. • India had cut central excise duty on petrol and diesel by INR 5 per liter and INR 10 per liter respectively effective November 2021. Mitigating efforts taken by the US The ongoing war between Russia and Ukraine has resulted in increased fuel prices across the globe. The US has witnessed this increase by a dollar per gallon for gas prices amid shortage of supply. To mitigate the impact of fuel price inflation and support the consumers, President Biden has announced a two-part plan that includes increasing the oil supply immediately and achieving American energy independence to reduce demand for oil and support clean energy economy. 5

6. Measures to Mitigate Rising Fuel Prices Increasing supply immediately After Russia’s invasion of Ukraine, gas prices increased to over US$4.20 per gallon from US$3.30 a gallon at the start of the year. Even after the hike in gas prices, the US President, with support from the Republicans and Democrats in Congress, banned the import of Russian oil. In addition, as part of the two-part plan, President Biden has announced an immediate increase in supply of gas by encouraging domestic production and releasing from the Strategic Petroleum Reserve to act as a bridge to improve supply in coming months. but unused permits. President Biden has now asked companies to pay fees on wells that haven’t been used for years and are situated on public lands that they are hoarding without producing. These companies are now given an option to either start producing or pay a fee for each unused well. Releasing from the Strategic Petroleum Reserve: President Biden has announced the largest release of oil reserves in history, which would increase production by one million barrels per day at least for the next six months. The US President is also coordinating with allies and other countries to join in this action. This unprecedented release will help providing historic supply and would serve as a bridge until the end of 2022 when domestic production ramps up. The Department of Energy would use the revenue generated to restock the reserve for future and ensure the continued readiness of the reserve to respond to future emergencies. Increasing domestic production: The US is already approaching record levels of oil and natural gas production, while domestic production is expected to grow by 1 million barrels per day in 2022 and 700,000 barrels per day in 2023. But there are still many companies such as One, that are not doing their part and are against the increase of production. Currently, the oil and gas industry has over 12m acres of non-producing federal land with ~9,000 approved Achieving real American energy independence The US will bet impacted by the ongoing war even though the country is a net energy exporter. To overcome this, the US President has announced real energy independence to reduce dependence on oil altogether. The plan includes accelerating the transition to clean energy made in America, which will help in creating millions of good-paying union jobs in clean industries and save money for families in the immediate future, including ~US$950 a year in gas saving by using electric vehicles and additional US$500 a year by using solar and heat pumps to power homes. In addition, the President issued an order, authorizing the use of Defense Production Act (DPA), to promote American production of critical materials such as minerals and materials used for large capacity batteries, to strengthen the country’s clean energy economy by reducing its reliance on China and other countries. President Biden also announced historic efforts to improve energy efficiency and lower cost for consumers. The Department of Energy has opened applications for over US$3bn in new Bipartisan Infrastructure Law funding for energy efficiency and electrification upgrades. The Administration also advanced smart standards that will help in saving an additional US$100 annually per family through more efficient home appliances. 6

7. Measures to Mitigate Rising Fuel Prices Measures taken in different states in the US • Some Democrats in the Congress have suggested to drop Federal gas taxes for the rest of the year. Dropping the tax at ~18.4 cents a gallon would provide significant relief for consumers. • Different Connecticut, Georgia, and Maryland suspended gas taxes for periods ranging from one to 14 months. • Florida proposed a one-month gas tax holiday to go into effect in October. • California and Illinois suggested a gas tax freeze at current level instead of allowing automatic tax increase. • The Governor of California has also proposed a rebate for car owners that doesn’t lower the gas price directly but eliminates some of the sting of high prices. Tax suspension impact on consumers varies by state with gas levies ranging from 15 cents in Alaska to 67 cents in California, according to the Tax Foundation. states are rolling back gas taxes. Conclusion There is no clarity on what will happen in the future regarding fuel prices, due to the ongoing war along with other factors that may come about in the future and impact the already inflated fuel price. But, to mitigate the risk of rising fuel prices, some behavioral changes are expected from consumers, including reduced driving through carpooling or WFH, reduced spending on other goods and services, and shifting to more efficient all-electric vehicles. This would reduce personal overdependency on fuel and encourage consumers toward a healthier lifestyle. 7

8. Measures to Mitigate Rising Fuel Prices About the Author Swanand Dhabu • Lead Analyst Swanand Dhabu has been working in the Financial Research industry for the last seven years with focus on Equity Research. He has worked extensively for the Buy-side as well as Sell-side clients based in the US and Europe. Swanand has cross-industry experience and is currently working closely for the Automobile, Airlines, and Transportation sectors. Disclaimer This document makes descriptive reference to trademarks that may be owned by others. The use of such trademarks herein is not an assertion of ownership of such trademarks by SG Analytics (SGA) and is not intended to represent or get commercially benefited from it or imply the existence of an association between SGA and the lawful owners of such trademarks. Information regarding third-party products, services, and organizations was obtained from publicly available sources, and SGA cannot confirm the accuracy or reliability of such sources or information. Its inclusion does not imply an endorsement by or of any third party. Copyright © 2022 SG Analytics Pvt. Ltd. www.sganalytics.com GET IN TOUCH New York | Seattle | Austin | London | Zurich | Pune | Hyderabad 8