Worst news about petrol prices in South Africa for 25 years

At the current oil price and rand-dollar exchange rate, South Africa is on course for the biggest petrol price increase in the past 25 years. 

This will be compounded by rising taxes levied on fuel sales, with both the General Fuel Levy and RAF Levy rising from 1 April. 

Chief investment strategist at Old Mutual’s Symmetry, Izak Odendaal, explained that this is largely due to the closure of the Straits of Hormuz. 

While the closure is not an official announcement or a physical barrier, shipping through the Strait has come to a halt amid the conflict in the region. 

The Iranian retaliation to the US-Israeli strikes has been to target Gulf nations across the Persian Gulf, threatening shipping in the region. 

Iran has also said it will sink any ship trying to traverse the Strait, with US intelligence indicating that it has mined areas of the Persian Gulf. 

Around 20% of all exported oil flows out of the Persian Gulf, with much of it going to China and other Asian countries. Disruption to this shipping is the main reason why oil prices have skyrocketed. 

“With the Straits of Hormuz still closed, Brent crude oil has been bouncing between $90 and $100 per barrel,” Odendaal said. Some analysts see potential for oil to cross $150 per barrel if the conflict persists. 

This means South Africa’s regulated petrol price, which adjusts monthly, will rise by around R3.70 per litre in April for 95 octane and R3.40 for 93 octane.

“This will be the biggest monthly increase in at least the last 25 years. The over R6 per litre increase in the diesel price is even worse. This is going to hurt,” Odendaal said. 

However, Odendaal has tempered fears of a wider shock, noting that the Reserve Bank will try to look through the first-round effects of such a spike to see if it impacts other prices in the economy.

“Oil prices have always been considerably more volatile than the consumer inflation rate. Fuel prices are but one of many components of the consumer price index, accounting for only about 5%,” Odendaal explained.

“It is how businesses and consumers respond to fuel prices that matters more, in other words.”

Odendaal also noted that perspective is needed, as, since incomes rise over time, $100 oil is not the same today as 5 or 10 years ago.Adjusted for inflation, the April petrol price will be high but not extreme. 

Matter of timing

Much of the increase in petrol and diesel prices depends on when the conflict comes to an end, with there still being time for a swing in the oil price to significantly impact South Africa. 

Stanlib chief economist Kevin Lings said that the asset manager expects the oil price to adjust lower if the conflict is resolved within the next week or two. 

“At the current price level, oil has huge implications for South Africa’s petrol and diesel prices. It is starting to set us up for a monster increase in April,” Lings said. 

“If the conflict were to be ended fairly soon, then our expectation is that the oil price would come back down quite sharply. It can dissipate quite quickly.”

However, for this to happen, the conflict has to be resolved, which appears to be unlikely given comments from the United States and Iran. 

The more significant impact of rising fuel prices in South Africa is the potential to reverse the decline in inflation and interest rates over the past few years. 

“This is going to be a huge shock to South Africa’s household and business sectors in April, and there is not a lot we can do about it,” Lings said. 

The government does not have the ability to limit the impact on consumers, as the country does not have much of a strategic oil reserve, and it does not have the financial capacity to provide a subsidy or reverse tax hikes.

“Using $100 per barrel and the current exchange rate, it is possible for South Africa’s inflation rate to move up an additional 1.2 percentage points. That is huge,” Lings said. 

“What that would mean is that instead of inflation being at 3.3%, it would potentially be 4.5%. That may not sound substantial, but it is much higher than the 3% target for the Reserve Bank.” 

With interest rate changes, timing is key once again, with the resolution of the conflict in the near term potentially reversing these projected increases. 

“A lot of this depends hugely on how long the conflict lasts. It does not look to us as though there is a huge amount of discussion regarding how this ends,” Lings said. 

Lings has indicated that, at the present price increases to petrol and diesel, the Reserve Bank would halt its cutting cycle and not hike interest rates.

Prior to the war, Stanlib projected a cut of 25 basis points in March.