Big petrol and diesel price hikes announced for May

The Department of Mineral and Petroleum Resources has officially announced significant hikes to petrol and diesel prices in South Africa.

Petrol is set to rise by over R3 per litre, while diesel will rise by over R6 per litre from 6 May when the hikes take effect. 

This has been driven by the rise in international oil prices amid the closure of the Strait of Hormuz by Iran and a blockade on oil exports from Iranian ports by the United States. 

The effective closure of the strait has cut global oil supply by around 20% and severely impacted the price of refined petroleum products. 

This has been coupled with a weakening of the rand as investors flock towards safe-haven assets and away from emerging markets. 

As a result, prices at the pump in South Africa will rise significantly in May, with the department announcing the following changes –

• Petrol 93 – increase of R3.27 per litre
• Petrol 95 – increase of R3.27 per litre
• Diesel 0.05% – increase of R6.19 per litre
• Diesel 0.005% – increase of R6.19 per litre

These increases come in spite of the National Treasury announcing an extension to the temporary R3 per litre reduction in the General Fuel Levy. 

The full relief will be extended throughout May, and in June, it will be partially reversed to continue providing some comfort while ensuring the government’s finances are not severely impacted. 

While the relief appears that it will come to an end in a few months, Old Mutual Investment Group (OMIG) senior analyst Sisamkele Kobus said the government can find room to extend it further. 

Kobus said the R3 cut not only has a material impact on the price of fuel at the pump but will also help contain inflation, potentially shaving off 0.2 percentage points. 

The current level of relief is costing the government R6 billion per month in revenue from the General Fuel Levy.

Over three months, the cost will rise to R18 billion, which Kobus said the National Treasury can absorb at a stretch. To sustain it for a year, based on historic fuel consumption, the government will lose R70 billion in revenue.

However, OMIG data indicates that additional tax revenue from the mining industry is likely to cross R40 billion in the current financial year. 

This would ordinarily significantly boost the state’s financial health, enable it to post a wider primary surplus, and stabilise its debt burden. 

However, Kobus explained that this time around, there will be some temptation to offer further relief to South African consumers amid elevated oil prices. 

Were the state to use the R40 billion overrun from the mining industry to offer relief to South Africans, it could extend the R3 cut to the fuel levy by six months.

However, it will come at the cost of being yet another example of the excess revenue generated by a commodity boom being used to fund short-term expenditure rather than long-term growth. 

The additional revenue should ideally be spent improving the state’s finances or investing heavily in infrastructure to drive future growth.