Understanding the factors behind rising petrol prices in South Africa
ADVOCATE LAVAN GOPAUL
ACCORDING to the Central Energy Fund, we can expect the following fuel price increases on the 5th of February 2025, despite the rand pulling back from recent highs over R19/$ and oil prices pulling below $80 a barrel.
The predictions (so far) are:
Petrol 93: increase of 95 cents per litre
Petrol 95: increase of 88 cents per litre
Diesel 0.05%: increase of R1.11 per litre
Diesel 0.005%: increase R1,08 per litre
In recent years, South Africans have witnessed a consistent increase in the price of petrol. For a nation that heavily relies on petrol to power its daily activities, whether commuting to work, transporting goods, or running businesses, the rising petrol price is a serious concern, impacting individuals, businesses and the broader economy.
What causes petrol price hikes, and what are SA's challenges and economic consequences?
The reasons behind the petrol price increase
The primary factor contributing to the increase in petrol prices domestically is the fluctuation in global oil prices. We import oil and are heavily impacted by global oil market changes. Global supply and demand dynamics, geopolitical factors, and natural disasters influence oil prices—the volatility caused by geopolitical tensions in oil-producing regions, particularly in the Middle East. Conflicts, wars and sanctions imposed on oil-rich countries like Venezuela and Iran have disrupted global oil supply chains. Further, decisions made by organisations like OPEC (Organization of the Petroleum Exporting Countries) to cut or increase production can significantly impact global oil prices, directly influencing South Africa’s petrol price.
The COVID-19 pandemic also played a significant role in altering oil prices. With global travel restrictions and the slowdown in industrial activity, demand plummeted, driving prices to historic lows. However, as the global economy began to recover, demand surged, pushing oil prices back up. This spike in oil prices has been exacerbated by supply chain disruptions, making it even more difficult for South Africa to maintain stable fuel prices.
Several key components determine the price of petrol:
Basic Fuel Price (BFP): This accounts for the most significant portion of the petrol price and is based on international market prices for crude oil. South Africa imports most of its crude oil and must respond to global oil price fluctuations.
Fuel Levy: The government imposes a fuel levy, which includes the Road Accident Fund, on every litre of petrol as part of its tax policy to fund infrastructure projects and road maintenance and to contribute to the national fiscus. This levy contributes to the country’s infrastructure and road maintenance funds. In recent years, this levy has been steadily increasing.
Retail Margin: This portion reflects the cost of petrol stations in distributing the fuel to consumers. Government regulations determine this cost but are also influenced by supply chain issues and transportation costs.
Exchange Rate: South Africa’s reliance on imported crude oil means that the value of the South African Rand (ZAR) against the US Dollar (USD) is crucial. If the Rand weakens against the Dollar, the price of imported oil rises, causing petrol prices to increase. The rand has long struggled with currency depreciation, which means that the cost of imports (including oil) rises when the Rand weakens against the US Dollar. Our currency is notoriously volatile and sensitive to both local and international economic factors. War, trade, global political sentiment, and investment sentiment for SA and its neighbours are some factors that affect the Rand.
Transport Costs: Moving oil from refineries to petrol stations, particularly inland, also affects the final retail price of petrol. Recent reports of supply chain disruptions, especially those caused by logistics bottlenecks and fuel transportation issues, have driven up fuel prices. These challenges are compounded by the limited refining capacity, leading to greater reliance on imports of refined petrol.
The challenges and impact of rising petrol prices
1. Economic strain on households: Rising petrol prices create significant economic pressure on households, particularly those in lower-income brackets.
2. Inflation and the cost of goods: As petrol prices increase, transporting goods becomes more expensive, increasing the cost of goods when they hit the shelves. This is the classic definition of inflation. Inflationary pressures ripple effect across the economy, exacerbating the financial strain and impacting interest rates.
3. Impact on business and investment: Inflation can discourage investment in specific sectors, particularly in industries that rely heavily on transportation or logistics. The agricultural sector, for instance, faces challenges with rising fuel costs, which add to the cost of production and transport of goods. This can reduce competitiveness in international markets, as South African products become more expensive than those from countries with lower energy costs.
The rising petrol price in South Africa is a complex issue with multiple contributing factors, including global oil price fluctuations, exchange rate volatility, fuel levies, and transportation costs. The challenges it poses for consumers, businesses, and the economy as a whole are considerable. The ripple effect of rising petrol prices cannot be underestimated, from higher living costs and inflation to reduced investment.
While it is unlikely that the country can entirely insulate itself from global oil price shocks, efforts can be made to improve domestic energy security, reduce dependency on imported oil, and explore alternative energy sources. Additionally, managing the fuel levy responsibly, improving infrastructure to lower transport costs, and providing targeted assistance to the most vulnerable populations could help mitigate the impact of petrol price increases.
The challenge moving forward is addressing the immediate impacts of rising petrol prices and creating a more sustainable and resilient energy and transport system that can weather global economic turbulence and ensure long-term affordability for all South Africans.
Advocate Lavan Gopaul is the director of Merchant Afrika.
** The views expressed do not necessarily reflect the views of IOL or Independent Media.