"The determination of fuel prices in South Africa came under heavy fire because the international crude oil price soared after Russia declared war on Ukraine," said Fanie Brink, an independent agricultural economist.
The fact that the government has embarked on a process to deregulate the fuel industry, which is also supported by various other political parties, has put the sustainable supply of fuel in the country at great risk, which could lead to large fuel shortages.
The latest announcements and statements about the determination of fuel prices by politicians are once again clear attempts to win political points on a strategically important economic issue about which they have exactly no idea what they are talking about.
The Minister of Finance, Enoch Godongwana, has on more than one occasion made statements on this and said, “SA will move to 'full deregulation' of the fuel prices in time, with wholesalers and retailers competing to sell 93 and 95 octane petrol below the retail price.”
Unfortunately, the Minister does not have an idea what “full deregulation” means! The deregulation of the fuel industry could lead to the destruction of the local fuel supply in South Africa.
The biggest problems encountered with current fuel prices are the specific price formula according to which the basic fuel prices are calculated that are exposed to major volatile international political and economic events that determine the crude oil price, as well as changes in the local exchange rate.
Another problem that has always been used as an easy way for the government to supplement its revenue is the fuel levy that is adjusted upwards every year and has to be paid by fuel consumers.
The fuel price formula, as well as the retail and wholesale profit margins, to which the oil companies are by nature very sensitive for understandable reasons, were in fact already negotiated by the government in the 1950s with the fuel industry together with specific regulated guarantees that were agreed upon such as the basic price formula and the profit margins of the industry.
These guarantees have served the strategic supply of fuel to South Africa very well over a very long period of time and cannot simply be deregulated by economically illiterate and incompetent politicians. The existing pricing formula will also be very difficult to replace with a “better pricing formula” by the government, any other political party or institution without making the supply of fuel virtually impossible because it is still the most practical and best formula to apply.
The government did reduce the fuel levy by R1,50 per liter for two months, which it could not actually afford and which would have to be offset by the sale of crude oil reserves, after which a "better price formula" will be determined.
The “basic price formula” (landed cost or import parity price) of fuel off the coast of Durban is not determined on the basis of the international crude oil price, but on the prices of fuel at three international oil refineries off the Mediterranean coast which are derivative prices of the international Brent crude oil price that are extracted from the North Sea along the United Kingdom and Norway.
The agreement with the fuel industry stipulated that the prices of crude oil refined in South Africa should be as cost-effective and price-competitive as the fuel prices of the best technologically advanced oil refineries in the world. Local fuel prices are, therefore, determined on the actual cost of imported fuel and not directly on the international crude oil price.
The proposal of the Freedom Front Plus that the levy for the Road Accident Fund should be abolished and returned to third party insurance will not work at all. The method of collecting of the levy is not the problem, but the application of the levy by a totally corrupt institution that manages it and will not be improved by any other collection method.
"The sustainable supply of fuel in South Africa has now been put at risk by the government's plans to further deregulate the industry because the government plans to move away from the guaranteed agreements on the formula according to which the basic fuel price as well as the profit margins of the oil companies that are established and adjusted every year as were agreed upon years ago.
A unilateral deregulation of the fuel industry will not be acceptable to the international oil companies and they can very easily decide to pack their bags and leave the country.
The war that Russia is currently waging in Ukraine is expected to be temporary in nature and should under no circumstances be allowed to destroy the sustainable fuel supply in SA just because the government does not understand what it is doing.," Brink said.
Fanie Brink, Independent Agricultural Economist
