EXPLAINER: How South Africa’s petrol price is set
This article first appeared on The Conversation.
South Africa’s latest fuel price increase, which came into effect on 1 December, put the cost of petrol over the R20 per litre mark (about US$1.25) in parts of the country for the first time. The increase sparked public outcry. The Conversation Africa’s Nontobeko Mtshali asked energy sector expert Rod Crompton to share his insights into what influences the price – which is adjusted monthly – and to explain how it’s calculated.
What are the three broad components of the pump price of fuel in South Africa?
The first is the price of importing petrol, an import parity price called the Basic Fuel Price. The second component consists of regulated margins. These are the regulated costs and profits for wholesale, retail and pipeline transport services. The third component is made up of taxes and levies such as the Road Accident Fund levy, which pays for insurance for traffic accident victims. Added together, they result in the regulated petrol price seen at service stations.
How do changes in these broad components affect the pump price of fuel, more specifically the monthly adjustments?
The monthly adjustments are driven by the import parity price (Basic Fuel Price). It responds to changes in the Rand/US dollar exchange rate and international prices of petrol. Taxes and levies are changed in the annual national budget and regulated margins usually once a year.
South Africa has been importing an increasing amount of refined fuel rather than crude oil. Is this having an impact on monthly changes to fuel pump prices?
No, the import parity price (Basic Fuel Price) is not affected by the volume of imports. The volume of petrol imported does not affect the price. The price is determined using a formula, which on any given day yields a certain price, regardless of how much is imported on that day. It is changes in the value of inputs in the Basic Fuel Price formula that cause the monthly price changes.
Is South Africa’s approach to the pricing of fuel unique? If so, why was this approach chosen and is it still the most efficient way of determining fuel pump prices?
Petrol price regulation dates back to the second world war. The reasons for continuing with it from then on are not recorded but appear to have been to protect the profits of the investors in the value chain (refiners, wholesalers and retailers).
In 1998 the White Paper on Energy Policy set the policy objective as price deregulation, in line with many other countries. This policy objective has not been achieved because vested interests have opposed it and government has lacked the political will to implement its policy.
Efficient pricing is associated with market prices. Our research showed that there are errors and secrecy in some of the methodologies used and that market prices would be 70 to 90 cents per litre lower than regulated prices. Further research showed that these inflated prices are costing the country 0.67% of the gross domestic product or R30 billion (just over US$1.8 billion) a year. Think of what this could mean for the workforce that relies upon minibus taxis. According to the Council for Scientific and Industrial Research almost 60% of households in Johannesburg and Pretoria spent more than 10% of their income on public transport in 2019/20.
During the apartheid era the petrol pricing methodology was tangled up in the pursuit of several industrial and social policies. After democracy in 1994, the new democratic government’s White Paper set out to untangle these petrol pricing issues. Instead, it has added new ones and allowed vested interests to increasingly paint it into a corner, to the point that it appeared to have given up on reform. However, on 10 December 2021, the new Minister of Finance, Enoch Godongwana, called for fuel price reforms in parliament. Perhaps he will add new impetus to the stalled reform.
Are changes to the pricing of fuel overdue? If so, what would be the best alternative for pricing fuel?
Yes, they are long overdue.
Petrol prices are regulated but diesel prices are not. Lots of vehicles use diesel these days. So what is the market failure warranting regulation of petrol prices that is not applicable to diesel? Government should tell the public, because there is no evidence to suggest that the petrol market is more prone to market failure than the diesel market.
The best alternative would be to implement government’s policy of deregulation and at the same time promote the use of electric vehicles, which are currently disincentivised. Electric vehicles would mean huge savings – petroleum is South Africa’s largest single import. And it would allow beneficiation of local resources – wind and solar to make electricity and raw materials for batteries.
It would also add new manufacturing sectors for power generating equipment and batteries. South Africa already has an auto manufacturing sector which is transitioning to manufacture electric vehicles because its main market (Europe) is switching to electric vehicles. In addition, all of these changes would result in lower energy emissions and better prospects for South Africa to meet its international climate change commitments.
Rod Crompton is the adjunct professor at the African Energy Leadership Centre Wits Business School, University of the Witwatersrand.