Big petrol price changes for South Africa

Significant changes are set to be made to how the fuel price is calculated in South Africa. President Ramaphosa said the Government of National Unity (GNU) will review the formula to identify how prices can be reduced. 

In his Opening of Parliament Address last week, Ramaphosa said the GNU would focus on reducing the prices of basic goods for South Africans amidst a rising cost of living. 

This would include a comprehensive review of administered prices, particularly the fuel price formula. 

Around 85% of all goods in South Africa are transported by road at some point, making fuel a significant input into the cost of everyday items. 

This also means that the price of fuel has a significant impact on the country’s inflation, helping to drive up prices and keep inflation sticky. 

A review of how the fuel price is calculated, particularly its tax components, has been long touted as an easy way to reduce inflation and ease financial pressure on households. 

Currently, taxes make up R6.18 of the price of a litre of petrol and R6.06 of the price for a litre of diesel. 

These are only the taxes levied by the National Treasury, which include the General Fuel Levy, Road Accident Fund (RAF) Levy, and a carbon tax. 

The Department of Mineral and Petroleum Resources enforces additional levies, such as the slate levy and petroleum products levy. 

In total, this means that R6.40 per litre of petrol goes towards paying taxes and levies – over 25% of the total price for fuel at the pump. 

In the past financial year, the National Treasury collected around R89 billion from the taxes levied on fuel.

The Automobile Association (AA) has consistently called for the Department of Mineral and Petroleum Resources to conduct an open and transparent review of South Africa’s fuel pricing structure.

“South Africans remain constrained by high fuel costs, and there is a dire need to review the country’s fuel pricing structure; each line item that comprises the fuel price must be interrogated and assessed,” the AA said.

“Together with civil organisations and experts, a better model must be sought to find ways to mitigate rising costs and buffer South Africans against ongoing geo-political developments which impact local fuel pricing.”

A major player in the GNU, the DA, has also called for the fuel price formula to be reviewed with a focus on these taxes and levies. 

President Ramaphosa appeared to heed these calls in his Opening of Parliament Address, saying his government would review the fuel price formula with a view to reducing the price of petrol and diesel at the pump. 

How the fuel price can be changed

The South African government could reduce petrol prices by imposing a special tax on monopoly companies, among other measures, to make up for the shortfall of the fuel levy. This could lead to a price reduction of around 35% per litre.

This suggestion comes from the People Against Petrol and Paraffin Price Increases (PAPPPI), which argues that multiple solutions exist to tackle high prices that the government is not pursuing. 

PAPPPI suggested that South Africa follow India’s example. India has shifted its focus away from OPEC nations, which manipulate oil prices by cutting output, and started purchasing oil from countries offering more competitive rates.

It recommended leveraging the BRICS pact to buy oil from countries like Russia and Iran, which offer more competitive rates.

Additionally, they propose re-commissioning many refineries that have closed in recent years to reduce reliance on imported fuel by increasing local production.

Lastly, PAPPPI suggests removing taxes and levies imposed on fuel at the pumps and considering alternative revenue sources.

They propose imposing a ‘special tax’ on monopolies listed on the JSE, such as Sasol, which generates huge profits using South Africa’s resources.

“The revenue from fuel levies doesn’t need to come from motorists. It can come from a special tax on the monopoly industry that sits on the JSE,” they said.

This, they added, would immediately reduce the price of petrol in the country by 35%.

Economist Dawie Roodt told Daily Investor that the solution to reducing fuel prices in South Africa is simpler and less complicated than PAPPPI makes it out to be.

He argued that the problem is excessive state spending and reliance on high fuel levies revenue.

“The state is far too big and highly incompetent, which is costly. Effective management and cost-cutting within the fiscus could easily remove the need for the current levels of fuel levies, which would cut fuel prices in the country,” Roodt said.

He also said the taxes levied on fuel are particularly attractive to the government as they are hard to avoid, easily collected, and generate a significant portion of its revenue.

Commenting on PAPPPI’s recommendations, Roodt acknowledged that reopening refineries may have potential and could reduce petrol costs by decreasing reliance on imported fuel.

However, he noted that importing from BRICS nations such as Russia and Iran would come with additional costs, and imposing a special tax on monopoly industries would drive those companies out of the country.

“It is quite simply a very bad idea to impose a tax on companies,” said Roodt.

He explained that private companies in South Africa are already highly taxed, and an additional tax would just encourage them to leave the country. 

“Of course, we could get our oil from Russia or Iran, but it would come at a political cost.”

“We also can’t automatically assume it would be cheaper for South Africa to buy from those countries because the country would have to pay more for things like insurance, so it’s a bad idea.”

Roodt said reopening refineries in South Africa could potentially work, but it would be incredibly challenging.

This is because South Africa would struggle to find investors willing to invest in such projects and skilled operators for the refineries.

Alternatively, if the state ran the refineries, they would likely follow the fate of many other state-owned entities and become disastrous, according to Roodt.