Avs’s ‘cap’ on fuel prices collapses under the weight of its own contradictions

According to Angelo Bonelli and Nicola Fratoianni, “the discount offered by oil companies is merely a pittance”. The government, they say, should issue a decree “that caps fuel prices for a year and brings them back to September 2025 levels”: around €1.70 per litre for diesel and €1.60 for petrol, compared with the €2.19 and €1.99 promised by Eni and IP. To paraphrase H.L. Mencken, the proposal is clear, simple and wrong – and, one might add, inconsistent.

To understand the economic implications, one must look at the entire supply chain. Groups such as Eni are vertically integrated: through various companies and divisions, they operate in crude oil extraction, refining and distribution. Put simply, refineries purchase oil at market prices and resell the processed products to distribution networks, again on market terms. The commitment made by Claudio Descalzi – which has since been largely replicated by IP and perhaps others (Palazzo Chigi is exerting moral suasion on Kuwait to persuade the Q8 group to follow the pricing policy of Eni and the Azerbaijani firm Socar/IP) – concerns the final link in the chain: sales to the consumer.

This means that Enilive, the Eni Group company that manages petrol stations, purchases fuel at market prices from other companies within the same group or from third parties, and then sells it at a price not exceeding the cap. This financial sacrifice results in a squeeze on margins, or even a loss, at the pump. However, Eni is able to absorb the impact because it is an integrated group: rising international prices lead to higher costs in the retail segment, but also to higher profits from crude oil extraction and refining. Downstream costs can be offset by upstream profitability.

This is precisely what makes a voluntary cap very different from a cap imposed on everyone by the government. Independent operators do not have access to those upstream profits. For them, a rise in product prices is simply an increase in costs. If they wish to follow Eni and IP to avoid losing market share, they must sacrifice their own margins; if they were to sell below cost for an extended period, they would have no way of offsetting the losses. Independent petrol stations account for around a third of the Italian network: their presence is one of the reasons why the market has developed a vibrant competitive dynamic. A blanket price cap could therefore have a paradoxical effect: in an effort to keep prices at the pump low, it would ultimately force into bankruptcy precisely some of the operators who have helped to keep them down. And this is no minor detail: Italian fuel prices, excluding tax, are below the European average.

Why, then, not apply the cap at a higher level, thereby squeezing refining margins? The problem would be the same, just on a different scale. In the short term, all other things being equal, this would encourage the channelling of products towards markets where prices are not subject to administrative constraints. In the long term, it would reduce the profitability of industrial activities that have already endured difficult years. The risk would be to accelerate the phasing out of refining capacity just as Europe is considering how to maintain a sufficient level of it to protect us from shocks.

Finally, there is a political contradiction. AVS has for years argued that the price of fossil fuels must rise – including through mechanisms such as the ETS – to make the transition to ‘clean’ alternative technologies more affordable. Now that price rises are doing exactly what climate policy should aim to achieve – making the use of fossil fuels more expensive and encouraging diversification – the response is to neutralise this signal. They would like to shift the cost elsewhere: onto taxpayers, through cuts to excise duties, or onto oil company shareholders, through a price cap that would limit profits and thus the return on invested capital. But doing so would remove the very incentive to switch to cleaner energy sources.

In short: Avs’ proposals are counterproductive in the real world, where they would make fuel even more expensive. But they are also contradictory in the imaginary world of election promises: one cannot simultaneously call for decarbonisation and claim to subsidise the consumption of fossil fuels.