Tired of the fluctuating fuel price?

While some motorists are happy that petrol is now a few cents cheaper – prices were adjusted on Wednesday (5 July) – consumers driving diesel vehicles and businesses reliant on trucks will see higher numbers at the fuel pumps.

The price of all grades of petrol at inland petrol stations decreased by 24 cents, but the price of diesel increased by 12 cents.

Koketso Mano, senior economist at FNB, says the decrease in the petrol price and increase in the diesel price is due to the interaction of a stronger rand and higher oil prices. “There was an over recovery of around 20 cents per litre petrol during June, but an under recovery of around 15 cents per litre of diesel.”

The new prices for July are aimed at “balancing the books” according to the methodology used by government to set fuel prices in SA.

The South African Petroleum Industry Association (Sapia) says the calculation of petroleum product prices (petrol, diesel and illuminating paraffin) is done daily by the Central Energy Fund (CEF) on behalf of the Department of Mineral Resources and Energy (DMRE).

The monthly price change that is made is essentially an average over a prior period applied to the future month.

“This means that South Africa fuel prices lag international prices by one month,” it says.

Ester Ochse, product head at FNB Integrated Advice, says the latest increase in the price of diesel is not “such good news” as it will have an adverse effect on inflation. “It affects the transport cost of goods.”

Fluctuating fuel prices have prompted a Moneyweb reader to ask whether it is possible to set fuel prices for longer than just a month to reduce uncertainty for businesses and consumers.

“A question I’ve been asking myself for a while: Why is the fuel price not set for the fiscal year? The means to do it – the data, qualified staff and equalisation fund – are all in place,” says Kevin.

“The obvious benefit for me is that, whatever the price, it would eliminate the unexpected fluctuations. It would simplify cost calculations, especially for the transport industry, and in turn help stabilise prices at the till.”

Not so easy …

Economists highlight a few difficulties with his idea, mostly because exchange rates and oil prices are very difficult to forecast.

Another big problem is that government would have to finance any under recovery for much longer.

Johann Els, chief economist of Old Mutual Investment Group, doesn’t think the idea of fixing the price for a year would work.

There are number of reasons, he says, including:

• “I am against any form of price fixing – especially in a free-market economy. Ideally prices should fluctuate daily and not even monthly as is currently the case. Any price-fixing creates market distortions (i.e. we might use more fuel than we would have if prices are set too low). Eventually, the fixed price cannot be sustained and then prices rise abnormally, as recently happened in Nigeria.
• “Massive price resets every three months or every six months, or once a year, might create far more volatility than the current monthly price adjustments.
• “Government cannot afford to do so, so other taxes might have to rise to finance a petrol price fix.
• “Or, if government does so without raising taxes, then other expenditure will need to be cut.
• “Alternatively, government will have to borrow more money to finance the price fix. The deficit will be higher, creating distortions such as credit rating downgrades – which will lead to a weaker rand, higher interest rates and such.”

“In all of these options the consumer, or taxpayer, will eventually pay for periods of cheaper petrol or the resultant distortions,” says Els, adding that the distortions might “cost” significantly more than just taking changes in the petrol price as they come.

Government finances

Specialist economist at Nedbank, Johannes Khosa, says it would be difficult to fix the petrol price for long periods “because the petrol price is influenced mainly by global oil prices and the rand/dollar exchange rate, which are very difficult to predict”.

“Added to this, it is a highly regulated price, with taxes making up a sizeable portion of the price.

“Price fixing has a long history of failure across different jurisdictions. It often forces producers and services out of business, resulting in severe shortages and ultimately surging prices,” says Khosa.

“The benefits, therefore, prove temporary. If the government continues to carry it, in the form of subsidies, it often translates into surging debt levels and deficit financing constraints, and, somewhere down the line, much higher taxes.

“Ultimately, if the cost of fuel cost is rising, someone is carrying the burden, whether in real-time or delayed through some form of price fixing.”

Khosa also mentions the recent surge in fuel prices in Nigeria as an example of how fuel subsidies have gone wrong.

“The main problem is to forecast the oil price and rand – both very difficult to get right. This might lead to massive price changes once a year. Ultimately, someone in the pipeline carries the cost of production.

“If it is government, it is really the tax payer,” he says.

The state does not have the liquidity to finance any under recovery for a year, given that SA consumes around 23 billion litres of petrol and diesel per annum.

Read: On the road to the economy of the future

“Government already runs a sizeable budget deficit (above the sustainable 3% of GDP level) and the country’s debt burden continues to climb.

“An important question is whether fluctuating petrol prices are the greatest constraint faced by the economy, to warrant significant government intervention. We would argue that it is not our greatest challenge.”

Khosa says that at present the pressure on fuel prices is not coming from rising global oil prices, but rather from a weak and vulnerable rand. “And possibly also from persistent high taxes on fuel.”

So it’s good news and bad news for consumers …

The Automobile Association (AA), in its review of the latest fuel price adjustment, says the breakdown of the data shows that the average exchange rate used in the basic fuel price decreased over June from around R19.50 to the dollar to around R18.80 per dollar – which accounts for most of the petrol price decrease.

But the movement in international oil prices is impacting negatively on diesel, contributing significantly to its increase, it adds.

“A decrease to the price of petrol is naturally welcome news, and will provide some relief to embattled consumers.

“The increase to diesel, though, means input costs in, amongst other sectors, the agricultural and manufacturing sectors, are also likely to increase which may result in higher prices for consumers,” says the AA.

“Increases to fuel prices also mean an increase to goods which are transported across the country as operators recover these higher input costs through increases which are passed on to consumers.”

Alleviate rising fuel prices through other means?

In its statement the AA says it reiterates its position of mid-April 2021, when it made representations to the Parliamentary Portfolio Committee on Mineral Resources and Energy “that several steps can be taken to mitigate rising fuel costs in the country”.

It says these steps include a recalculation and audit of the existing elements within the fuel pricing model and a reduction of the costs of the Road Accident Fund (RAF) to motorists through:

• Better management and governance of the RAF;
• Improved road safety to reduce demand on the RAF;
• Better traffic policing;
• Safer roads, safer drivers, safer cars and better post-crash intervention;
• Better pedestrian safety education; and
• The privatisation of the RAF, or at minimum, semi-privatisation of claims management.

The AA also mentions that the misappropriation of funds and corruption are siphoning money away from the government which could be used better if allocated properly and accounted for.

“Investments in alternative forms of public transport and investments in improving Transnet are vital,” it says.

Listen to Fifi Peters’s interview with senior Minerals Council SA executive Tebello Chabana about how Transnet inefficiency may have cost the country R150bn in lost opportunity (or read the transcript here):

You can also listen to this podcast on iono.fm here.