If you’re worried about rocketing petrol prices — which hit R8,25 a litre in Gauteng last week and are set to increase further — you can take some comfort from the fact that reform of the fuel sector is finally under way, with the promise of a freer, more efficient fuel market kicking in early next year.
The key change will be that the current regulated price system will in future only be used to determine maximum prices. Dealers will be able to set their own pump prices so long as they do not exceed the regulated maximum.
The new system would already be in place, says the Department of Minerals and Energy’s Nhlanhla Gumede, but first reforms are needed to the wholesale price, now 39c a litre.
Under the present dispensation the oil companies paid this money based on a set return on the assets they use to market fuel.
But the existing way of calculating the formula, which harks back to the bad days of apartheid when government was keen to throw all kinds of money at the oil industry just so that it stayed in the country, mixes both retail and wholesale assets in determining the formula.
The mooted reforms could see the oil majors lose as much as 20c a litre of their slice of the petrol price pie. The majors control about two-thirds of fuel sales in the country, suggesting that they stand to lose as much as R3-billion a year from the 23-billion litres in annual sales.
The idea, says Gumede, is that once the industry has operated for some months on the new separate wholesale and retail margins, then maximum prices will be introduced.
This means that petrol, as is the case with diesel at present, can be sold for less than the regulated price so long as sales do not take place above the maximum price.
Competition in the retail sector could reduce prices by perhaps 5c or 10c a litre in urban areas, says Gumede. This is particularly the case of areas which have a lot of fuel stations, Randburg with 68 stations being a case in point. The retail margin at present is 59c.
He says it is unlikely that rural prices will be affected as there is far less competition.
In the meantime, says Gumede, non-fuel assets such as car-washing facilities and convenience stores are already being stripped out of the formula used to determine wholesale assets.
Gumede says proposals to reform the system were put to the oil companies last April, but that they have been dragging their heels. He expects the new formula to be in place within the next few months and then for the new maximum price system to begin early next year.
Diesel is currently not regulated at the pump, but will also be subject to maximum pricing under the new dispensation.
The new system will open the way for supermarkets such as Pick n Pay, which for many years has been keen to discount petrol. The prohibition on importing fuel will, however, remain.
Gumede says import prices at present are about 2% below that of the BFP, the basic fuel price, which is determined by a calculation based on refinery gate prices in the Mediterranean and in Asia. He says that the differential could be seen as an incentive for any refiner to invest billions in building South Africa’s refining capacity.
At present, the country refines 670Â 000 barrels of crude equivalent a day and uses 690Â 000 barrels, the difference being made up by imports, which is on a permit basis and limited to the market incumbents. If Pick n Pay wanted to import fuel, it would not be able to.
Gumede says that importing crude means a substantial saving in foreign exchange compared with refined product.
This is 39% more expensive in the case of diesel and 25% for petrol, meaning that if the country did not refine crude, our import bill for transport fuel, the biggest single import item, would be 30% above what it is now.
The prohibition on self-service at fuel stations will remain, as indeed it should.
The marketing margin at present pays an allowance per litre to the fuel companies for the maintenance of storage facilities, even though it has been found that many do not store any fuel at all.
Storage assets will in future be separated out and the allowance will only be paid where the companies actually store fuel.
The ideal situation would be one where price is regulated by the market, but the South African market has developed in a highly lopsided manner, with one company, Sasol, having a stranglehold on the key inland market of Gauteng. Chevron controls the Western Cape, PetroSA the Eastern Cape and Shell, BP/Engen control KwaZulu-Natal.
Free competition under these circumstances would mean that Sasol could in effect set its prices at anything it wanted them to be, given that fuel is a relatively price-inelastic commodity.
One question is whether prices would settle at above or below import parity in a free market. In conditions of over-supply, as we have had for decades, you’d expect a competitive market to be priced below import parity. But with demand now exceeding refining capacity, prices could be expected to be at import parity.
The mooted reforms will do much to bring efficiency to the system and encourage wise investment rather than the helter-skelter chase to build more and more expensive garages. The only thing missing to my mind, which would keep the whole system honest, is lifting the prohibition on imports.