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Thursday / 20 June 2024
HomeFeaturesWhy petrol is more expensive than it should be in South Africa

Why petrol is more expensive than it should be in South Africa

South Africa is currently experiencing sky-high petrol prices as the local currency is nowhere near its “fair value” of R15 per US dollar.

The rand/US dollar exchange rate largely influences domestic fuel prices. South Africa relies heavily on imported fuels to sustain demand which are purchased in dollars, hence, the worse the exchange rate between the two currencies, the more expensive the liquid gold gets.

At present, the rand is deemed undervalued as a consequence of several local and global factors, according to Investec chief economist Annabel Bishop.

Domestically, the upcoming national elections have cast uncertainty on investor confidence with many adopting a wait-and-see approach.

Internationally, expectations around interest rates in the United States (US) have shifted with experts believing that a rate-cutting cycle in the world’s biggest economy will now only start at the end of 2024.

“The US core PCE deflator, key for the US monetary policy trajectory, remained unchanged in March at 2.8% y/y, with the stubborn nature of underlying inflation causing markets to push the start of US rate cuts out to December,” said Bishop.

“US interest rate expectation volatility has mainly driven movements in the domestic currency, weakening the rand.”

Due to these factors, the rand is unfortunately far away from its purchasing price parity (PPP) of R15/dollar.

What could have been

The last time South African tender hovered at R15.00 to the greenback was Wednesday, 20 April 2022.

Since then, it has devalued by over 26% to an average of R18.9036/dollar as at 25 April 2024, which is what this May’s fuel price adjustments were calculated on.

Apart from the rand, the other main determinant in the prices we see at the pumps is international petroleum product costs, which are dependent on oil prices.

On 20 April 2022, one barrel of Brent Crude oil traded at approximately $108. On 25 April 2024, it sat at a far lower $88, reflecting a drop of roughly 19%.

The table below compares the prices of the two main grades of petrol in South Africa between these two dates:

Fuel April 2022 May 2024 Difference
Petrol 93 R21.63/litre R25.15/litre +R3.52/litre
Petrol 95 R21.96/litre R25.49/litre +R3.53/litre

Petrol was already substantially cheaper two years ago even at the inflated rates at which oil swapped hands, mainly due to the PPP of the South African rand.

At this point it should be said, not the entire domestic fuel price is made up of oil, as the black gold largely influences only the Basic Fuel Price (BFP).

The following table shows the composition of local fuel rates, as published by the Department of Mineral Resources and Energy (DMRE):

The BFP evidently comprises roughly 55% of the prices we’re seeing at filling stations this May, or R13.83 for 93 unleaded and R14.17 for 95.

By itself, the BFP can be further dissected into four elements:

  • The cost of buying refined fuel overseas
  • Transport
  • Insurance
  • Local docking

The price of refined fuel is what oil rates impact the absolute most.

Average international price of petrol from 2006 to 2024 in US$/gallon

The average international price of petrol in May 2024 is sitting around $2.50/gallon, or $0.66/litre, equating to R12.48/litre at current exchange rates.

This is far lower than the $3.38/gallon we paid in April 2022 when oil was trading at over $108/barrel.

From this, we can also deduce that transport, insurance, and local docking account for a mean of 11% of the BFP.

Hence, had the rand still been at its fair value of R15/dollar today, South Africa could have paid just R9.90/litre for petrol on the international market, translating to an ideal BFP of R11.13/litre if the other costs are also factored in.

Plug that back into the entire equation, and it shows that had the rand been at its true PPP, we would have paid around R22.11/litre for Petrol 93 and R22.79/litre for Petrol 95 this May – a minimum savings of R2.70/litre.

The reason this is not as low as it was back then can be chalked up to higher distribution and storage costs, more taxes, and increased dealer margins.

Between April 2022 and May 2024, the added components in the country’s petrol price calculation changed by:

  • Wholesale margin – Increase of 24.3c/litre
  • Secondary storage – Increase of 5.9c/litre
  • Secondary distribution – Decrease of 0.74c/litre
  • Router differential – No change
  • Retail margin – Increase of 56.9c/litre
  • Zone differential in Gauteng – Increase of 17.9c/litre
  • IP Tracer Levy – No change
  • Fuel Levy – Increase of 152c/litre
  • Customs & Excise Duty – No change
  • RAF Levy – No change
  • Petroleum Products Levy – No change
  • Slate Levy – Decrease of 30.7c/litre
  • Pump Rounding – Decrease of 0.5c/litre

These fluctuations tacked on an additional R2.25/litre to domestic petrol prices over this period.

These figures are largely affected by inflation in the domestic market, so they would have gone up regardless of whether the rand maintained its strength at R15/dollar, just probably not as much.

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