The risk of ever-higher fuel prices should be negated by the South African National Treasury, as one of the functions of the Treasury is to provide macro-economic stability, but currently the volatile and rising international oil price is creating instability.
On Thursday, the South African Reserve Bank monetary policy committee (MPC) was unwilling to cut interest rates to boost growth, even though inflation prospects are good, due to the risk that higher fuel prices may lead to higher inflation.
“Although the outlook for inflation is generally favourable as described above, the MPC has decided that it would be inappropriate at this stage to change the monetary policy stance in view of the risks to the inflation outlook,” the MPC said.
Prior to 1991, the government changed the retail price of petroleum product prices only infrequently, despite a volatile oil price over the prior two decades.
On May 20 2004, the Department of Minerals and Energy announced that the government was concerned about the current and projected future increases and had requested the department to, within the limited resources, investigate options to cushion anticipated fuel-price increases.
“Should the options that are currently being investigated prove viable, consumer prices increases should be kept as low as possible for as long as possible,” the department said at the time.
In the February 2005 Budget, Minister of Finance Trevor Manuel raised the fuel levy by five cents per litre (c/l) to 116c/l for petrol and 100c/l for diesel.
This would bring in an extra R950-million in the fiscal year starting in April, so a 50c/l “transfer” to the Equalisation Fund to cap retail fuel prices would therefore “cost” the Treasury R9,5-billion.
It is more likely that the Treasury will once again exceed its revenue projections in the coming fiscal year. In the 2004/05 fiscal year, the original revenue projection was for R327-billion, while the provisional data shows that there was a R28-billion over-run and the actual revenue collected was R354,4-billion.
The R9,5-billion cost is a charge that can easily be borne by the National Treasury, as it ended the 2004/05 fiscal year with R30,87-billion in cash instead of the R19,17-billion given in the revised estimate presented in February this year and the original projection of R6,5-billion given in the February 2004 Budget.
Revenue growth in the first quarter of the fiscal year (April to June) has been 18,6% year-on-year (y/y), compared with a Treasury forecast of only a 5,2% increase for the full fiscal year, which means that the Treasury had a record cash balance of R52,7-billion at the end of July.
The recent move of the futures oil price to a record $66,11 per barrel means that the daily petrol price has moved from an over-recovery of 2,873c/l on August 3 for unleaded petrol with a 95-octane rating to an under-recovery of 13,06c/l on August 11. An over-recovery means that the price can decline at the next price adjustment.
The diesel 0,3% sulphur price has over the same period moved from an over-recovery of 22,86c/l to an over-recovery of 1,886c/l.
The retail petrol price and wholesale diesel price are adjusted monthly on the first Wednesday of the month in accordance with the previous averaging period’s over- or under- recovery. The averaging period for the September 7 adjustment is from July 29 to September 1.
The main reason for the wide differential between diesel and petrol prices is that it is currently the American “driving” season, when Americans drive on their summer holidays.
This season started on Memorial Day — May 30 this year — and ends on Labour Day — September 5 this year. Americans tend to drive cars that use petrol (called gasoline in the United States), whereas in Europe there are more diesel-driven cars.
The current high oil price is in part driven by refinery breakdowns in the US, as refineries operate at more than 90% capacity utilisation to meet the petrol requirements during the driving season.
Once the driving season is over, operators can then schedule maintenance, as they switch from producing more petrol to producing more heating oil for the winter season.
The seasonal drop-off in demand from early September to late October normally results in lower oil prices during that period, so the burden on the Treasury of capping fuel prices may not be anywhere near R10-billion.
In 2003, the Gauteng retail petrol price dropped from 406c/l in September to 382c/l in November, while last year, the drop took place between June’s 471c/l and August’s 431c/l. — I-Net Bridge