South Africa’s latest fuel price hike, which took effect on December 1, put the cost of gasoline above R20 per liter in some parts of the country for the first time. The increase sparked public outrage. Nontobeko Mtshali of The Conversation Africa asked energy industry expert Rod Crompton to share his thoughts on what influences the price, which is adjusted monthly, and explain how it is calculated.
What are the three general components of the fuel pump price in South Africa?
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The first is the import price of gasoline, an import parity price called the Basic Fuel Price. The second component consists of regulated margins. These are the regulated costs and profits for wholesale, retail, and pipeline transportation services. The third component is made up of taxes and levies such as the lien from the Road Accident Fund, which pays for the insurance of traffic accident victims. Together, they give as a result the regulated price of gasoline that is seen in service stations.
How do changes in these general components affect the fuel pump price, more specifically the monthly adjustments?
The monthly adjustments are driven by the import parity price (Basic Fuel Price). It responds to changes in the Rand / US dollar exchange rate and international gasoline prices. Taxes and levies are modified in the annual national budget and regulated margins generally once a year.
South Africa has been importing an increasing amount of refined fuel rather than crude oil. Does this have an impact on monthly fuel pump price changes?
No, the import parity price (Basic Fuel Price) is not affected by the volume of imports. The volume of imported gasoline does not affect the price. The price is determined by a formula, which on a given day returns a certain price, regardless of how much is imported that day. It is the changes in the value of the inputs in the Basic Fuel Price formula that cause the monthly price changes.
Is South Africa’s approach to fuel pricing unique? If so, why was this approach chosen and is it still the most efficient way to determine fuel pump prices?
The regulation of the price of gasoline dates back to World War II. The reasons for continuing thereafter are not recorded, but appear to have been to protect the profits of investors in the value chain (refineries, wholesalers and retailers).
In 1998 the White paper on energy policy set the policy goal as price deregulation, in line with many other countries. This policy objective has not been achieved because vested interests have opposed it and the government has not had the political will to implement its policy.
Efficient pricing is associated with market prices. Our investigate showed that there are errors and secrecy in some of the methodologies used and that market prices would be 70 to 90 cents per liter lower than regulated prices. Subsequent research showed that these inflated prices cost the country 0.67% of gross domestic product or R30 billion. (just over US $ 1.8 billion) per year. Think what this could mean for the workforce that relies on minibus taxis. According to the Council for Scientific and Industrial Research, nearly 60% of households in Johannesburg and Pretoria spent more than 10% of your income from public transport in 2019/20.
During the apartheid era, the gasoline pricing methodology became entangled in the pursuit of various industrial and social policies. After democracy in 1994, the White Paper of the new democratic government set out to untangle these gas price problems. Instead, he has added new ones and allowed vested interests to increasingly paint him in a corner, to the point that he seemed to have given up on reform. However, on December 10, 2021, the new Minister of Finance, Enoch Godongwana, asked for reforms in the price of fuel in parliament. Perhaps it will add new impetus to stalled reform.
Are fuel price changes behind schedule? If so, what would be the best alternative to set the price of fuel?
Yes, they had to do it a long time ago.
Gasoline prices are regulated, but diesel prices are not. Many vehicles use diesel these days. So what is the market failure that justifies the regulation of gasoline prices that is not applicable to diesel? The government must inform the public, because there is no evidence to suggest that the gasoline market is more prone to failure than the diesel market.
The best alternative would be to implement the government’s deregulation policy and at the same time promote the use of electric vehicles, currently discouraged. Electric vehicles would mean big savings: oil is from South Africa largest single import. And it would allow the benefit of local resources: wind and solar energy to produce electricity and raw materials for batteries.
It would also add new manufacturing sectors for battery and power generation equipment. South Africa already has a car manufacturing sector that is in transition to making electric vehicles because its main market (Europe) is shifting to electric vehicles. Furthermore, all of these changes would result in lower energy emissions and better prospects for South Africa to meet its targets. international commitments on climate change.
Rod Crompton, Adjunct Professor African Energy Leadership Center Wits Business School, University of the Witwatersrand