How South Africa can cut the petrol price by more than R1 a litre

 ·23 Feb 2022

The National Treasury has confirmed that it will review South Africa’s fuel price calculations as motorists grapple with record-high petrol and diesel costs.

In its Budget Review published on Wednesday (23 February), Treasury said rising prices affect the competitiveness of domestic firms and households’ disposable income.

“The two largest components of administered price inflation – electricity and fuel prices – increased by an annual average of 8.2% between 2011 and 2021, placing financial strain on households.

“Regular reviews of prices and their underlying methodologies help policymakers understand inefficiencies in pricing models and additional costs imposed on society, and create incentives for competitive outcomes.”

It cited a 2020 research paper that found that a combination of regulatory amendments can reduce the petrol price by 103.82 cents/litre (R1.03), increasing GDP by 0.67 percentage points by 2028.

“These include amendments to the international component of the basic fuel price as proposed by the Department of Mineral Resources and Energy in 2018 – but not yet implemented – and changes to the methodology underlying regulated margins,” it said.

It added that, since 2012, taxes and related levies for fuel have on average more than doubled as a share of the total fuel price.

“The National Treasury is considering reviewing the Road Accident Fund (RAF) levy, as changes in the operational model are expected to improve the Fund’s cash position by 2024/25. A comprehensive review of the fuel price could significantly reduce costs in the economy.”

Treasury also announced that it will not increase either the general fuel levy or the RAF levy in 2022.

2018 proposals

In 2018, the Department of Mineral Resources and Energy published a discussion document on reformulating the country’s Basic Fuel Price (BFP).

At the time that the BFP was first introduced, South Africa was a net exporter of refined petroleum products. However, since 2006 there has been a ‘dramatic change’ in this position and the country is now a net importer.

“The Basic Fuel Price is based on the Import Parity Pricing (IPP) principle. However, the total amount of imported products versus the total products manufactured locally is not factored into the pricing formula to determine the prices in South Africa.

“This is because the BFP is a deemed pricing mechanism which assumes that there are no refineries in South Africa.”

In 2018 South Africa had four crude refineries and two synthetic fuels refineries operational which produced about 80% of petroleum products to meet local demand. Factoring in this shift, the department indicated that there was room to review how the BFP was calculated.

Landmark win for consumers 

The Automobile Asociation (AA) of South Africa described government’s decision not to increase fuel levies and review the petrol price calculations as a ‘landmark win for consumers’.

Currently, these levies combine to add R6.11 to every litre of fuel sold in the country, it said.

“The AA called on the finance minister not to increase these levies – as had been the case in previous years – saying such increases would be damaging to the economy, hard on the poor, and would lead to increases to goods and services across the board, especially as fuel prices are slated to once again reach record levels in March.

“This is a landmark win for all consumers – not only motorists – and while fuel prices may still increase the additional burden of higher taxes is now out of the way. We are naturally extremely happy that our calls have been heeded.”

The AA said finance minister Enoch Godongwana’s announcement that he and Mineral Resources and Energy minister Gwede Mantashe have agreed to review all aspects of the fuel price is an equally welcome development.

“We launched an online petition which secured 35,000 signatures to urge the government to review the fuel price and the fact that teams from the Departments of Finance and Minerals and Energy are engaging to make this happen is a great victory for the consumer.”

The AA said it will engage the government with a view to contributing to the fuel price review in any way it can, mindful that its inputs are motivated by promoting and protecting consumer rights.

Read: Good news for motorists – no petrol tax hikes

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