The oil industry in South Africa is doing more than nicely thank-you from government-controlled fuel margins that appear extremely generous compared with those in markets Australia and the United States.
All three — South Africa, Australia and the US — have a high reliance on private transport.
Fuel prices this week topped R6 a litre in Gauteng for the first time.
The government controls both the wholesale margin — what oil companies earn for moving fuel from refineries to service stations — and the retail margin, the portion of the fuel price paid to the service station operator.
Government-approved wholesale and retail margin increases have averaged 10% a year since 1997.
The margin from refinery to motorists at service stations in South Africa is more than twice that of the US.
A comparison of data from the Department of Minerals and Energy in South Africa and the Department of Energy in the US shows that retail and wholesale prices in South Africa tracked US margins between 1997 and 2002, although they were typically about 5c a litre more expensive.
After 2002 the margins started diverging sharply.
Last year the South African retail margin was 18c a litre pricier than in the US; the wholesale margin was 27c a litre more expensive.
The combined retail and wholesale margin last year was 35c a litre more expensive than its average between 1997 and 2002.
At 10-billion litres of petrol sold a year this is worth an additional R3,5-billion a year to fuel distributors and retailers.
The latest Fortune magazine features a representative gallon of petrol in the US market priced on September 7 this year.
It shows that distribution and marketing costs are 2% of the pump price or 3% if taxes are excluded. The equivalent percentages in South Africa for 95-octane petrol at the coast on the same day were 17% and 30%.
A similar picture emerges from comparing these margins with those earned by the oil industry in Australia.
As with the US market, margins differ but, according to the Australian Institute of Petroleum, typically average between Aus$0,04 and Aus$0,10 (20 to 50 South African cents).
The equivalent cost in South Africa in a coastal town is 89c a litre, comprising a wholesale margin of 39c, a retail margin of 43c and “zone differential” or transport costs of 7c.
The wholesale and transport elements are for the benefit of oil majors Engen, Shell, BP, Caltex and Total, which dominate fuel marketing and, to a lesser extent, Sasol.
There is intense dispute in the industry over who benefits from the retail margin.
Peter Morgan, of the Fuel Retailers’ Association, says that while oil companies own only 40% of service stations, they pump 60% of volumes.
Industry sources say where garages are rented from oil companies the site operator can earn as little as 4c a litre after paying lease rentals, royalties and profit shares to the site owner.
South African Petroleum Industry Association spokesperson Colin McClelland describes this claim as “garbage”. He said 4c a litre would not even cover the wages of service station attendants.
Jeff Osborne, of the Retail Motor Industry Organisation, says lease agreements with oil companies are often “one-sided”.
“The oil companies keep on moving the goal posts. Dealer rentals are up exponentially, way ahead of CPIX [inflation excluding mortgage rates],” says Osborne.
The wholesale margin is based on giving the oil industry a 15% return on assets, which it uses to market fuel. Critics say this formula has led to an over-investment in service stations. There are too many and they are often unnecessarily costly in their construction.
The retail margin is calculated by the University of Potchefstroom (now North West). It samples sites and inspects their books to determine their profitability and makes recommendations to the government regarding retail margin increases.
McClelland said the amounts of maximum “controlled” margins are published and are known to all.
“It is only the retail price of petrol which has a minimum — the wholesale prices of petrol, diesel and paraffin are maximums only. There is no reporting of or estimating of actual sales prices in South Africa that I am aware of,” he said.
The Ministry of Minerals and Energy did not respond to e-mailed questions on the apparent large disparity between South Africa, Australian and US fuel margins.