South Africa's economy could win if the unfair benefits accruing to producers of synthetic fuels ended.
Every year the treasury increases so-called sin taxes on cigarettes and alcohol, both addictive substances whose use results in large health and social costs. So why not impose a similar tax on another substance that is a national addiction, deleterious to our long-term health and depleting globally: oil?
Consumers already pay taxes and levies on petroleum fuels amounting to about one-third of their retail price, which is now near the all-time nominal high of more than R10 a litre. Further fuel price increases would hurt poor people, who generally spend a large proportion of their meagre incomes on transport. The treasury should rather impose a “syn” tax—a windfall tax on the profits of synthetic fuel producers Sasol and PetroSA, which contribute about one-third of our fuel supplies. At the same time, consumers should begin a “rehab” programme to address their oil addiction.
A windfall tax on synthetic fuel profits will not make any difference to the price consumers pay for fuel, because national fuel prices are determined by the department of energy on an import-parity price basis. That means local basic fuel prices are benchmarked on international refined petroleum product prices, to which are added transport costs, wholesale and retail margins, and levies and taxes. Thus Sasol and PetroSA sell their synthetic petrol and diesel at the same prices as the companies—Engen, BP, Shell, Chevron and Sasol again—that refine imported crude oil.
Any increase in international crude-oil prices or a weakening of the rand exchange rate push up local fuel prices, raising the rate of inflation and hurting South African consumers, but it also boosts the profitability of synthetic fuel producers. PetroSA recorded an R871-million net profit in fiscal year 2011, whereas the Sasol Group’s operating profit increased by 25% to R30-billion.
Sasol is South Africa’s largest company by sales and market value and contributed R25-billion in direct and indirect taxes in the past financial year, ranking it among the country’s largest corporate taxpayers. PetroSA, by contrast, is wholly owned by the state.
So should an extra windfall tax be imposed on the synthetic fuel producers? This question was addressed comprehensively by a special task team appointed by then-finance minister Trevor Manuel in 2006, which found that both Sasol and PetroSA had benefited extensively from state support over several decades.
Sasol was created and funded by the apartheid state in the 1950s, but it was privatised in 1979 and is now listed jointly on the JSE and the New York Stock Exchange. Sasol’s first synthetic fuel unit was financed by the state-owned Industrial Development Corporation.
The company has always been guaranteed full uptake of its products at import-parity prices. It enjoyed low tariffs on the pipeline network constructed by Transnet over the years, which gave Sasol market access for synthetic fuels and gas and amounted to a subsidy of about R860-million a year. It also benefited from tariff protection worth at least R6-billion between 1979 and 2000. Moreover, Sasol was privatised “on terms very favourable to investors”, thereby benefiting a small group of shareholders, 40% of whom are foreigners.
Mossgas, which later became part of PetroSA, benefited from tariff protection on the same basis as Sasol, ultimately enjoying subsidies from motorists amounting to R1.5-billion until November 2004. Soekor, which discovered the gas feedstock, was funded by the government but later absorbed into PetroSA. The state invested R13-billion in Mossgas and R8-billion in Soekor and wrote off loans to these entities worth R8-billion and R1.5-billion, respectively.
The task team cited several independent estimates of the costs of production for existing coal-to-liquids and gas-to-liquids; these ranged between $22 and $45 a barrel and $18 and 3$0 a barrel, respectively. Even though these costs have surely risen over the past five years, the profitability of the synthetic-fuels producers indicates that they are considerably lower than recent crude-oil prices.
In short, the task team commented that “very large amounts of taxpayers’ money have been used to support and maintain the synthetic fuels industry”. It recommended the imposition of a windfall tax of R1.25 a litre of synthetic fuel at an oil price of $110 a barrel, which would garner more than R10-billion in annual tax revenue.
But Manuel shunned this advice and said the tax might undermine further investment in the synthetic-fuel industry, which he argued was necessary for bolstering energy security.
An additional reason cited by the treasury was that it could not be sure whether the windfall profits were of a cyclical or structural nature. With hindsight, it is clear that oil prices have been trending upwards for at least eight years now and they are expected to shoot much higher after the world passes “peak oil” production.
At the same time that the task team released its report, Sasol announced that it was considering building a new coal-to-liquid plant, dubbed Mafutha, but the company later said it needed partial government funding for an investment set to cost in excess of R50-billion.
Last year Sasol put project Mafutha on ice because of concerns about the costs of greenhouse-gas mitigation and the quality of coal in the Waterberg field. Thus the main justification for withholding the windfall tax has not materialised and, given climate change and other pollution concerns, that might be for the best.
The proceeds of a synthetic-fuel tax should not be used to subsidise domestic fuels, because this would encourage our oil addiction. The revenues should instead be used to reduce South Africa’s dependency on oil imports. Global oil production has been essentially stagnant for six years and an increasing number of analysts warn that we are at or near peak oil production and annual output will begin an inexorable decline within the next few years. As the International Energy Agency’s chief economist, Fatih Birol, is fond of saying: “We must leave oil before oil leaves us.”
Thus synthetic-fuel tax revenues should be invested in renewable electricity capacity and more efficient and sustainable transport systems, such as electrified rail for both freight and passengers. Subsidised public transport would be a much more sustainable form of support to poor commuters than fuel subsidies.
In a country with among the highest levels of inequality in the world, it is iniquitous that a few private shareholders, many of whom are foreigners, should profit at the expense of South Africans. The government should follow the example set by their Australian counterparts with their mining “super-tax” and divert resource rents to sustainable investments for the benefit of all South Africans.
Jeremy Wakeford is an independent economist specialising in energy and sustainability. He chairs the Association for the Study of Peak Oil South Africa (aspo.org.za), a think-tank researching the implications for South Africa of global oil depletion