Petrol price 2019: Not as bad as we might think

The big increase in the petrol price of 74c per litre on Wednesday and the looming increase in taxes of 29c to be phased in over the next couple of months – together with a weakening rand and predictions of rising oil prices – are likely to strain household budgets. But is seems unlikely that the petrol price will increase dramatically during the rest of the year.

That is unless big problems emerge in SA to hit the rand or in oil producing countries to propel oil towards $100 per barrel.

The highest the fuel price has ever been in SA was R16.85 in October through November last year. That was when the rand weakened to more than R15 to the dollar and the oil price reached a high of just above $85 per barrel. Luckily, the oil price then fell sharply to just above $50 over the next few weeks and the rand strengthened by more than R1 per dollar to deliver a bit of Christmas cheer to SA motorists.

Since late last year the oil price has been increasing steadily from the low of $50 per barrel to the current $64. Meanwhile, the rand has suddenly dropped to the wrong side of R14, yesterday trading at R14.20 to the US dollar.

The drop in the rand and higher oil prices might indicate further price increases in coming months if one considers that today’s increase in the inland petrol price to R14.82 per litre was based on an average exchange rate of R13.80 per dollar. Thus, motorists can expect a hefty increase in April as well if the rand remains at its recent lower levels.

But the worst with regards to fuel price increases might then be done with after the sharp increase in the petrol price today and the increase in fuel levies and taxes due over the next few months.

Further increases in the petrol price is likely to be subdued in 2019, under the rather generous assumption that any forecast of our very volatile currency is fraught with uncertainty and oil prices are just as difficult to predict.

The Automobile Association put it in a nutshell in a press release last week: “Fuel is a volatile priced commodity. Geopolitical developments affecting international oil production and supply, and the value of the rand against the US dollar, both play a major role in the monthly determination of the fuel price.”

One does not need to look further than the current situation in Venezuela, one of the world’s major oil producers, for an excellent example of political uncertainty. And, most people will agree that chances are close to zero that the last 100 years of animosity in the Middle East will be settled within the next few weeks.

Conflicting views on the international oil markets indicate fairly stable oil prices this year.

On the demand side, global economic growth forecasts seemed to have been tempered, which might put a cap on oil prices for the moment. However, at a meeting in the first week of December last year, Opec members agreed to reduce oil production by 800 000 barrels per day and their allies by another 400 000 barrels until the middle of 2019. Their stated aim is to push the oil price to around $70 per barrel before the middle of the year.

There are a lot of arguments and different views whether this is attainable. According to the authoritative International Energy Agency in America, production of shale oil in the US has increased lately, undermining Opec’s ability to control the international oil market.

What can South Africans expect with regards to the fuel price in 2019 given unpredictable currency and commodities markets? Things do not look that bad when considering the components that make up local fuel prices.

We can expect the petrol price to differ by no more than a rand or two from current levels, unless exchange rates or oil prices – or both – change dramatically. The reason for this rather mundane prediction is that a large component of the petrol price is set by government regulation rather than by international oil and currency markets.

A detailed explanation by the SA Petroleum Industry Association of the components of local fuel prices show that the so-called Basic Fuel Price (determined by the exchange rate, oil prices, international shipping rates and international refining margins) makes up only 39% of the total cost of a litre of fuel delivered to Gauteng. The other 61% comprises fixed levies, taxes, secondary delivery cost, retail and wholesale margins, storage costs and what is known as the Gauteng zone difference. These have all been set for the year and will remain at current levels, whatever happens to the rand or the price of crude.

In fact, the department of energy has said it is looking at changing the benchmark reflecting refinery costs in an attempt to lower fuel prices. This will, in effect, reduce local refineries’ margins.

Examples of these other fixed costs per litre of petrol include the retail margin of R1,94 per litre and the 35c per litre allowed for storage and distribution.

The following table gives a fairly good idea of the effect of the exchange rate and oil prices on the petrol price (excluding the effect of any changes in international refining margins, shipping and insurance).

Table 1: Indication of the effect of the oil price and exchange rate on the local petrol price

The table illustrates that the petrol price is not that sensitive to changes in the oil price and the exchange rate. For instance, the petrol price will change around 40c to 80c if the oil price changes by $5 per barrel and 20c for every 50c difference in the value of the rand.

At an exchange rate of R14 per dollar and an oil price of $60, the model indicates a fuel price of around R14.10 per litre, close enough to current prices to give a fair indication of the effect of the interaction between the rand and the oil price. Optimists might opt for a low oil price of $50 and an exchange rate of R12 per dollar, which will yield an indicative price of below R13 per litre petrol.

Most prominent international market players and analysts see the oil price between $60 and $70 per barrel this year, in line with Opec’s desired range, while currency traders and economists predict the rand around R15,50. At the higher end of this range, the petrol price should still remain below R16 litre.

Local economists seem to be slightly more optimistic. The average prediction of the exchange rate during the last 3 months of 2019 by the 37 economists polled monthly by Sake 24’s Economist of the Year competition is R13,88 with an oil price of $65. These predictions were published in February.

The worst prediction among these economists is for the rand at R14,80 at year end and the highest prediction of the oil price is $72 per barrel, which still translates to a fuel price around R16 per litre. 

If the rand drops to some R18 per dollar due to election stress and a decrease of capital flow to SA, but the oil forecast holds at $65 per barrel, fuel prices could jump towards R17.

Things only get real bad if we side with the worst pessimist at the dinner table who sees the rand above R20 to the dollar and oil at $100. Then we’ll rush through R20 per litre faster than a Ferrari taking off from a traffic light.