Petrol and diesel prices in Bulgaria reached a record low at the end of last week, dropping below the psychological threshold of BGN 2 (EUR 1.01) a litre at petrol stations. The fact itself is no sensation – oil prices in the world have been dropping to around USD 50 a barrel with expectations being of their plummeting to USD 40 a barrel, a record low in at least six years. Is this a good or a bad thing for Bulgarians, what do we stand to lose or gain?

There can be no unequivocal answers to these questions as it all depends on our angle in analyzing this tendency. According to the influential financial news company Bloomberg, Bulgaria is on the list of countries that can only stand to gain from the plummeting liquid fuel prices, with expectations of a GDP growth of 0.8 - 0.9 percent in consequence – a sizeable percentage seeing as according to the government, the economic growth rate for the year will reach this exact same percentage. So, the cheap oil will apparently double this country’s economic growth.

But there are many economic analysts in Bulgaria who are much more cautious in their assessment of the possible consequences of the dramatic drop in fuel prices. And the arguments they adduce sound very credible. The first one of them is there to be seen – the deflation we have been having for around one year. Negative inflation is a scourge for the economy, a scourge the European Central Bank recoils from as from a hot flame. Deflation is harmful to the economy because it squelches business growth incentives. It may stimulate demand in the short-term, but ultimately the practical effect is quite the opposite – the sluggish business activity results in a slump in production and trade, in company revenues and leads to job losses.

The decline in fuel prices will have a direct negative effect on the state revenues from taxes and on the revenues of companies, producing and/or trading in petroleum products. Suffice it to say that the biggest enterprise in Bulgaria providing jobs to thousands is Lukoil Neftohim in Bourgas on the Black Sea coast. Its financial results are bound to be hit hard by the plummeting of oil prices, something that will quickly and directly affect salaries as well as jobs. As to national budget revenues, the projections for the year were calculated on the basis of prices of around USD 90 per barrel or double the real price of oil at this time with no prospect of any change in the foreseeable future. ”In the long-term the drop in fuel prices is cause for concern for the budget as well, because there will be even less VAT coming into it,” comments Andrey Delchev, Executive Director of the Bulgarian Petroleum and Gas Association. Ultimately, the state will have less money for putting its policies through and that includes the social sphere, education, security, public services, the judiciary etc. In other words, in state finance the effect the lower oil prices will have will again be negative. What is more, an increased fuel consumption, which, after all has its natural and economic constraints, can hardly be expected to compensate for all this.

Yet there are spheres that stand to gain from the plummeting oil prices. First and foremost – transport, a sphere in which the low petrol and diesel prices will push production costs down thus stimulating business. The drop in petrol and diesel prices became conspicuous in the summer of last year. However since that time the decline in transportation prices in Bulgaria has been negligible and sporadic. Tourism is another sphere that stands to gain, as transport costs account for a sizeable portion of the price of tourist packages and tours. It should not be forgotten that tourism generates over 15 percent of the GDP in Bulgaria, employing thousands on a permanent or seasonal basis.

In the final analysis, taking stock of what the drop in oil prices means does not in fact give a clear picture. On the one hand it is not at all a bad thing to pay less at petrol stations, yet these low prices are damaging to public finance and this is something the man in the street is bound to feel the backlash of.

English version: Milena Daynova