Fuel price hike: Not much government can do

Hard facts suggest that President Cyril Ramaphosa’s idea that ministers working within the sphere of business and finance investigate the fuel price and submit proposals aimed at reducing prices will come up with few, if any immediate solutions. To date Minister of Energy Jeff Radebe’s solution to motorists is to “drive less”.

The fuel price comprises two elements: The cost to manufacture and distribute fuel, and a range of taxes and levies. There is little leeway to change either of these components in a way that it would make a noteworthy difference to the price at your local filling station.

Government has no control over the price of crude oil on international markets or the cost to refine crude oil to produce petrol and diesel. The basic reason why the petrol price has increased to current levels is because the price of crude oil has more than doubled from its low of around $30 per barrel at the beginning of 2016 to the current $77.

Government also has no direct control over the exchange rate, the second reason for the recent increases in the fuel price. Government policies that influence economic fundamentals affect the rand, but a group of ministers or the Reserve Bank has no direct control over exchange rates.

At the moment the rand is trading between R13 and R14 per dollar and there is little government can do about it immediately.

The cost of refining crude oil in SA is based on that of large refineries around the world to ensure that local refineries remain cost effective. Currently, the basic cost of a refined litre of petrol in SA is set at R7.60. This is effectively the cost to produce fuel anywhere in the world.

Other real costs include long distance transport, local delivery and the margins of filling stations for final distribution to users. These are all real, tangible costs and leave little space for adjustment.

These costs amount to R3.12 per litre, resulting in a total cost of R10.72 per litre. This includes all the costs such as salaries and profit margins, to put a litre of fuel in a car’s tank.

Taxes and levies add R5.30 to the price of every litre of petrol and diesel. The general fuel levy (tax to treasury) is R3.37 per litre, while R1.93 per litre goes to the Road Accident Fund (RAF). Import and excise duties are hidden among the delivery costs.

It is true that government controls the level of the tax and the RAF levy, but the unfortunate reality is that government cannot do without this income at the moment.

In his 2016 budget speech former finance minister Pravin Gordhan said “we cannot spend money we do not have and we cannot borrow more than we can repay.” This is more true today than in 2016 as government needs every cent it can lay its hands on to fund its bloated expenses.

Figures from the department of Energy show that SA consumed 12.1 billion litres of diesel and 11.2 billion litres of petrol last year. A decrease on the fuel levy of only R1 will cost National Treasury up to R23 billion. In contrast, government had to increase VAT in the last budget to 15% to raise an additional R26 billion to keep the wolves from the door. Relief from high tax on fuel seems impossible.

The RAF is also strapped for cash and motorists can forget about any change in this levy. In addition, government policy leans towards nationalisation of services rather than privatisation, as proved by its plans in the medical aid sector.

So, the ineffective RAF is here to stay. Likewise, high fuel taxes and high petrol prices are here to stay.

Tax on fuel to raise government revenue is not unique to SA. The major difference in the cost of fuel from country to country is the level of tax.

Retail fuel prices in China, Canada and the DRC are similar to that in SA due to similar levels of taxation. Petrol is much more expensive in Portugal at more than R25 per litre at current exchange rates. Petrol in the Netherlands and Greece is around R26 per litre. The highest fuel price is in Iceland at nearly R30 per litre according to globalpetrolprices.com.

Petrol is slightly cheaper in Mozambique (around R15) and even cheaper in Botswana (R11) as our neighbours add less tax.

Petrol is cheap in oil producing countries, such as Kuwait (less than R5) and Iran (R3.80) which probably only covers the refinery cost or indicates government subsidies. The Venezuelan government’s policy that the country’s large oil reserves belong to its citizens results in the lowest price in the world at less than 20c per litre.

The SA fuel price is close to the global average, based on prevailing exchange rates. Only a huge change in government policies to strengthen the rand and encourage less wastage in every government department and state enterprise will make a difference to the need for higher taxes.