Big change in South Africa’s petrol price explained

South Africa’s Government of National Unity (GNU) is set to review the petrol price formula, promising lower prices at the pump. However, relief is unlikely to come soon as it will be very difficult for the government to cut fuel taxes. 

This is feedback from Charles de Wet, an executive at ENS Africa’s Tax Practice, who explained that taxes levied on fuel are effectively a gold mine for the government. 

Currently, taxes account for R6.18 of the price of a litre of petrol and R6.06 of the price of 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. 

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. 

These taxes are easy to collect and hard to avoid, making them attractive revenue sources. Compared to the extremely narrow personal income tax base, a significant share of South Africans pay them. 

The General Fuel Levy (GFL) is a major source of government revenue, making up around 5% of all taxes collected in South Africa and worth R93 billion in the current financial year. 

De Wet said the reason this levy has become such a large component of the fuel price is that the government has poorly allocated money, forcing it to look for new ways to generate revenue and balance the budget. 

“What we have seen previously is that the GFL has been used to boost government revenue and try to balance the budget,” he said. 

When the levy was first implemented, it was intended to fund the maintenance of road infrastructure. However, it was swiftly moved into the general revenue account and can now be used however the government sees fit. 

The importance of this tax in terms of government revenue and the ease with which it can be collected mean that the state is unlikely to reduce this levy. 

De Wet said the GFL may be reduced from its current levels of R3.85 per litre of petrol and R3.70 per litre of diesel over time. However, in the short term, this is very unlikely to be touched. 

The GFL is a significant portion of the total fuel tax levied in South Africa, but it is not the only levy imposed at the pump. 

It is unique because the revenue it generates goes into the general revenue account. On the other hand, the Road Accident Fund (RAF) levy goes straight to the RAF to fund its operations. 

The RAF levy is currently R2.18 per litre of petrol or diesel. This is unlikely to be touched as the RAF is in dire financial straits, requiring additional funding. 

Taxes keep fuel prices high

A study conducted by Zaakirah Ismail and Christopher Wood, economists at the South African Reserve Bank, indicates that fuel levies rising faster than inflation have significantly contributed to the increase in fuel prices.

These regulated components of the fuel price have made up between 40% and 60% of the total retail petrol price.

Another crucial element is the Basic Fuel Price, which is determined by the cost of importing fuel into South Africa and associated insurance expenses.

This cost is heavily influenced by global oil prices, with the primary expense being acquiring oil or refined products from foreign sources.

The Department of Mineral Resources and Energy states that most fuel imported into South Africa originates from the Middle East, Singapore, and the Mediterranean region.

Given that most of South Africa’s fuel is imported, the rand/dollar exchange rate plays a significant role in the Basic Fuel Price. A stronger rand reduces the cost of importing fuel, while a weaker rand increases it.

Nonetheless, economists assert that regulated prices have been the main factor driving fuel price hikes over the last 15 years.

The primary regulated components of the fuel price include the fuel levy, the Road Accident Fund (RAF) levy, and retail price margins.

From 2015 onwards, regulated levies on the fuel price have made up a larger portion of the final retail price of petrol than the Basic Fuel Price.

The retail margin, RAF levy, and transport cost components increased by 40%, 44%, and 49%, respectively, in real terms over the decade leading up to the end of 2022.

These price hikes result from a mix of intentional policy decisions, institutional failures such as those associated with the RAF, and the specific methods used by the price-setters at the Department of Mineral Resources and Energy.

The graph below illustrates these increases.