An increase in the fuel price of 10 cents per litre costs the economy just over R1 billion per year.
This is according to economists at the South African Reserve Bank, Zaakirah Ismail and Christopher Wood, who recently released a study on fuel prices focusing on how government-administered levies drive price increases and keep inflation high.
This week all grades of fuel in the country experienced an uptick in prices, with petrol seeing a hike of R1.71 per litre across the board, while diesel prices are going up by a minimum of R2.76 per litre.
The largest driver behind these considerable increases is rising international product prices for petrol and diesel, which comes off the back of a voluntary output cut of one million barrels of oil per day by Saudi Arabia, the world’s largest oil producer.
The adverse performance in oil rates contributed around R1.35/litre to the price of petrol and between R2.44-2.53/litre to the price of diesel for September.
The rand’s depreciation against the US Dollar during August dealt another considerable blow to the upcoming price changes.
The fuel price is a major driver of inflation through transport costs and as a universal input in the production of goods.
Fuel price inflation can also drive wage inflation by increasing the cost of basic goods and services.
The economists warned that even short-term fuel price spikes could trigger stubborn inflation through wage and price increases.
South Africa is a net importer of petrol, which makes the country’s fuel price highly susceptible to external shocks.
However, the country is unique in that over the past decade, administered elements of the fuel price have accounted for between 40% and 60% of the final retail petrol price.
The most important elements of this are the increases to the fuel levy, retail price margins, and substantial increases in the Road Accident Fund (RAF) levy.
The retail margin, RAF levy, and transport cost components increased by 40%, 44% and 49%, respectively, in real terms over the ten years to November 2022.
These price increases result from a combination of deliberate policy choices, institutional failures in the case of the RAF, and the specific methodological choices made by the price-setters at the Department of Mineral Resources and Energy.
Fuel is a universal input in the production of goods and services, meaning the effect of fuel price increases is significant – with every 10 cents per litre increase in the fuel price costing the economy just over R1 billion a year.
On a positive note, there are multiple ways in which the fuel price can be reduced. The economists suggested four main ways to bring down South Africa’s fuel price:
- Reconsider proposals to move the petrol price to a maximum from a fixed, regulated price
- Review the viability of the RAF against alternative approaches, such as compulsory third-party insurance
- Review the methodology for calculating retail margins and update several outdated elements of the fuel price calculation
- Review the methodology for calculating inland transport costs
These suggestions could significantly reduce the price of fuel in South Africa by ensuring price increases are accurately calculated.
In particular, setting a maximum price for petrol could open up the sector to competition, which will drive prices down.