Reserve Bank economists call for petrol price changes
Economists at the South African Reserve Bank (SARB) have called for changes to the methodology for calculating South Africa’s petrol price.
Zaakirah Ismail and Christopher Wood conducted a study in August reviewing administered prices in South Africa as they are a significant driver of inflation.
In particular, the petrol price is a significant inflationary pressure as it is a near-universal input along with electricity and water, which risks raising the cost base of the economy.
South Africa is a net importer of petrol, which makes the local fuel price highly dependent on fluctuations in the global oil price.
However, despite much of the volatility in fuel prices being driven by global factors, administered prices play an important role in determining consumers’ final fuel prices.
Data compiled by economists show that key components of the fuel price have risen above inflation in recent years.
The retail margin, Road Accident Fund (RAF) levy, and transport cost components increased by 40%, 44% and 49%, respectively, in real terms over the 10 years to November 2022.
The economists recommended generally that the methodology be updated and made more transparent.
Changing the petrol price from a fixed, regulated price to a maximum price would significantly reduce fuel costs in South Africa since it would enable competition between providers, pushing the average price down.
They also suggested specific changes that can be made to components of the fuel price, in particular, the retail margin and the Road Accident Fund (RAF) Levy.
Retail margin
The retail margin is the difference between the price petrol retailers pay for fuel and the price they charge consumers.
The economists said this has been the most significant driver of fuel price inflation outside the basic fuel price and levies since 2015.
The regulatory accounting system – the new methodology for calculating retail margins – aims to reflect actual costs and sales volumes more closely.
However, the methodology is not transparent, and it is difficult to review the basis of the calculation.
Evidence from publicly released matrices shows that all components of benchmark service station costs rose by more than headline CPI between 2015 and 2020.
The greatest contributors to underlying cost increases appear to be wages and earnings for owners, with attendant wages growing particularly fast during this time.
Thus, the economists called for a review of owners’ remuneration and entrepreneurial compensation. Currently, owners receive these two forms of income, which the economists likened to receiving a wage and a dividend.
The earnings of owners make up 21% of the retail margin, which is a larger share than wages and is excessive as the calculation assumes all revenue comes from the sale of petrol and excludes retail sales.
The economists also recommended the survey that underpins the calculations of the retail margin be updated to include mandatory annual disclosures of costs and assets of petrol stations.
Road Accident Fund Levy
The Road Accident Fund (RAF) levy is a unique feature of South Africa’s fuel price. The levy is used to pay for public third-party road accident insurance, which is not mandatory in South Africa.
Third-party insurance is insurance that covers the costs of injuries or damage to property caused by the insured driver to others.
The RAF levy was once seen as a more affordable option for drivers, as it was typically lower than the cost of third-party insurance.
However, the cost of the RAF levy has been rising in recent years, and it is now similar to the cost of third-party insurance. This has led to calls for reviewing the RAF levy and introducing mandatory third-party insurance in South Africa.
There are a number of arguments in favour of mandatory third-party insurance:
- First, it would provide greater protection for road users. If you are injured in a car accident, and the other driver is uninsured, you may not be able to recover compensation for your injuries. Mandatory third-party insurance would ensure that everyone on the road is covered, regardless of whether they have insurance or not.
- Second, mandatory third-party insurance would likely reduce the number of uninsured drivers on the road. This would make the roads safer for everyone, as uninsured drivers are more likely to drive recklessly.
- Third, mandatory third-party insurance would likely increase the amount of money available to compensate victims of road accidents. This is because the RAF is currently facing financial challenges, and it is not clear how it will be able to meet its financial obligations in the future.
However, third-party insurance would increase the cost of car ownership for everyone. This is because insurance companies would need to charge higher premiums to cover the costs of uninsured drivers.
This would disproportionately affect low-income earners. This is because low-income earners are more likely to drive older cars that are less likely to be insured.
Third-party insurance may also create a black market for insurance. This is because some people would choose to drive without insurance rather than pay the higher premiums.
Thus, the RAF likely has a role to play in filling gaps in insurance coverage.
Other changes
The economists also suggested making other changes to the fuel price methodology. However, these changes will have a minimal impact on the price of petrol.
They called for a review of the methodology for calculating inland transport costs and recommended the methodology be made transparent.
Changes should also be made to the basic fuel price, with the methodology for calculating insurance, coastal storage, and ocean loss being updated.
Basic fuel price updates should also be more regular, occurring every two weeks.
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