Petrol, already topping a record R5 a litre in Gauteng and set to increase again next month, is widely seen as the main inflationary risk in South Africa today. However, a revision in the formula by which the fuel is calculated, could result in a small reduction in the fuel price, an economist says.
According to Econometrix economist Tony Twine, while such a revision would result in a saving of probably less than 10 cents per litre, this is not to be sneezed at because one cent per litre in the petrol price over a year comes to a total of R107-million.
“One would have to completely re-examine the import parity pricing portion of fuel price formula and isolate inaccuracies regarding the differences between cost of freight and insurance, for example, of transporting crude oil and transporting [the] refined product,” Twine asserted.
He explained that while crude oil was being transported to South Africa, consumers are paying as if it was refined fuel.
Twine said that it was more expensive to transport the refined product, because it had to be protected far more in terms of avoiding contamination.
It was also more expensive to insure, because one was insuring a product of greater value.
He added that other technical aspects of the fuel price formula also gave false price signals.
“Seasonal demands for petrol and diesel influence our prices in South Africa, which makes diesel prices go up when our diesel demand falls to its lowest point. In the northern hemisphere winter and our summer, when many of our factories close, we pay more for diesel when we use less. It gives a false signal,” he commented.
He said that while the higher cost of fuel in inland areas was to a certain extent fair, it was also to a certain extent unfair because 40% of South Africa’s petrol and diesel is supplied from Sasol’s refinery in Secunda, Mpumalanga, which was halfway to the coast, but the end user was paying as if the fuel was piped from the coast.
“I think the entire fuel pricing formula should be revisited. It does have some unnatural results,” he said, adding that the original justification for establishing the formula, which was done in the late 1960s and early 1970s, no longer applied.
“In the late 1960s and early 1970s, we were confronted by oil and petroleum sanctions. The formula we still have today was designed to keep oil companies, all of which were multinationals, operating in South Africa by allowing them to make as much profit from refineries here as they could anywhere else in world. Maybe that carrot has outlived its usefulness,” he concluded.
However, Henry Gumede, chief director for hydrocarbons at the Department of Minerals and Energy, (DME) disagreed.
“Import parity pricing for petroleum products is very applicable to South Africa, which is not a producer, but a net consumer of petroleum products. We do produce some petroleum products from domestic coal, but in the main we import crude oil. The only alternative to having a refining industry is to import finished product, so import parity pricing is fully applicable.”
He said that for security of supply, it was better to have a refining industry than to import the finished product, so maintaining this industry in South Africa was important.
From a balance of payments (BoP) perspective, crude oil was the biggest cash outflow item. If South Africa had to import refined fuel, this BoP position would worsen, which created further incentive to have a refining industry in South Africa.
Gumede said that this left South Africa with two approaches.
While the country could adopt a cost-plus system, which would take the cost of importing crude, refining it locally and then adding a mark-up, such an approach would bring “all manner of inefficiencies into any system”.
“If we look in a competitive market at what price would be set, that price would be import parity,” he argued.
“Even if the sector was deregulated tomorrow, we would still see import parity pricing.”
The DME’s deputy director general for hydrocarbons and energy planning, Dr Rod Crompton, added: “The basic fuels price formula recently replaced the in bond landed cost formula that the minister used to use. It has led to significant savings for motorists. It is not out of date.” – I-Net Bridge