South African motorists should not expect petrol prices to meaningfully improve for several months, despite the recent drop in global oil prices brought about by the de-escalating situation in the Middle East.
This is according to the renowned South African economist Dawie Roodt, who recently said that consumers should not expect oil prices to plummet in the short term.
In an interview with NSN, Roodt explained that many countries have depleted their strategic reserves because of the fuel crisis, and will now need to replenish their stocks.
“Over the next couple of months, there will be demand from many countries just to top up on their reserves,” he said.
Consequently, oil prices are unlikely to recover to their pre-war levels in the short term, and motorists will continue to deal with high petrol and diesel prices for months to come, wrote BusinessTech.
Roodt said the long-term outlook for oil is more optimistic, but stressed that any significant reduction is likely to take time.
He argued that the correct level for oil prices is likely well below $70 a barrel and suggested that $65 would be appropriate.
He also warned that geopolitical tensions remain. “There’s always the risk that the president of the United States may decide to kick-start the war all over again, and then all bets are off the table.”
Even if international oil prices decline, Roodt believes that South Africa will not immediately benefit because government finances will likely delay any meaningful drop in fuel prices.
“I think in South Africa we will see a reduction in the petrol price, not in the next month or two because the Minister of Finance is likely to try to recoup some of the lost tax revenue,” he said.
“So he will keep the taxes relatively high until he’s got his money back that he’s so-called given to us, and then the petrol price can come down quite nicely.”
Fuel tax undermining lower oil price
As a result, Roodt believes motorists will endure several more months of high fuel prices before conditions start to improve.
“Don’t expect the petrol price to come down immediately. Wait another two months or so, then you’re going to see some of that,” he said.
The Central Energy Fund’s (CEF’s) fuel price data already indicated that petrol and diesel would experience an over-recovery this July, but the situation in the Middle East has pushed the needle further into the green with an even larger cut on the cards for motorists.
The CEF’s latest data for the final week of June indicates that petrol will go down by between R2.88 and R2.92 per litre, while diesel will experience a larger decrease of between R4.52 and R4.95 per litre.
While this would normally translate to a substantial price cut for consumers, these savings will be undermined by the return of the General Fuel Levy (GFL).
The GFL was reduced by R3 per litre in April and March to offset the massive price increases caused by the war in Iran.
However, the National Treasury re-added half the GFL in June, and the remaining half will be added back this July.
Consequently, petrol will be hit with a R1.50 per litre increase, while diesel is getting R1.96 tacked on to its price.
Even though this won’t be enough to cancel out South Africa’s fuel price reductions in July, prices will still be much higher than they were before the war began.
Despite the short-term pain, Roodt believes that lower oil prices over the next year could have significant economic benefits by easing inflationary pressures and paving the way for lower interest rates.
“If I’m right on the oil price in a year’s time, at say $70 or even below that, then all sorts of positive things will come into play, and the inflation rate is likely to come down quite sharply to well below 3%.”
“I think the Reserve Bank is not going to increase rates anymore. In 10 months or so, there will be ample space for the Reserve Bank to start cutting interest rates as well.”
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