The Basic Fuel Price (BFP) is the rate at which South Africa purchases and imports fuel from other countries, and it consumes around 52% of the country’s petrol and diesel costs.
While the BFP is largely dependent on international oil prices and the rand/US dollar exchange rate, there is little available information in the public on how it is truly calculated.
In a recent Special Occasional Bulletin of Economic Notes, the South African Reserve Bank (SARB) revealed the complex set of assumptions and calculations that are included in the BFP.
BFP in detail
According to the SARB, there are eight variables that go into the BFP, namely:
- Free-on-board (FOB) values – Values for export-oriented refining centres in the Mediterranean, Gulf and Singapore
- Freight – Published by London Tanker Brokers Panel on 1 January each year, adjusted for risk and supply/demand of ships using the Average Freight Rate Assessment
- Demurrage – Published by the World Scale Association, with total demurrage time limited to 3 days
- Insurance and other fees – 0.15% of FOB value and freight
- Ocean loss – 0.3% of FOB value, freight and insurance
- Cargo dues – Based on tariff provided by National Ports Authority
- Coastal storage – Based on average international storage rate in 2012, adjusted by producer price index annually
- Stock financing costs – Calculated at 25 days of stockholding on landed cost values for refined petroleum, at prime minus 2%
The Department of Mineral Resources and Energy (DMRE) doesn’t post regular breakdowns of these costs, however, with the last available data being from 2019, said the SARB.
At the time, the unit costs of these inputs and their cost to the South African economy were as follows:
| Cost | Price in Nov. 2019 | Cost to economy 2019 |
|---|---|---|
| Free-on-board values | 587.145c/l | R58.72 billion |
| Freight | 21.002c/l | R2.10 billion |
| Demurrage | 0.632c/l | R63.2 million |
| Insurance and other fees | 0.913c/l | R91.3 million |
| Ocean loss | 1.829c/l | R182.9 million |
| Cargo dues | 2.648c/l | R264.8 million |
| Coastal storage | 3.603c/l | R360.3 million |
| Stock financing costs | 2.890c/l | R289 million |
There are other inputs that are also accounted for in the price structures of fuel, including wholesale and retail margins, inland transport and storage costs, and, of course, taxes and levies, but the BFP takes up the overwhelming majority of the prices we see at the pumps.
Source: South African Reserve Bank
How the BFP can be improved
Despite limited information being available, the SARB noted that there are a number of improvements that can be made to the BFP calculation to bring down fuel prices in South Africa, or at least reduce the severity of price hikes.
“For example, the DMRE methodology for calculating coastal storage costs is based on an outdated base estimate, with the values for costs based on a 2012 study of global average storage costs, which is inflated by the producer price index for final manufactured goods each year,” said the SARB.
“Given that South Africa has invested heavily in liquid fuel terminals at ports such as Saldanha Bay, the underlying price should reflect these structural changes in the industry, but almost certainly does not under the current methodology.”
Similarly, prices for insurance and ocean loss have not been updated since at least 2005, indicating that the BFP could benefit from a more regularised and open process of revision in order to keep it cost-reflective.
Source: South African Reserve Bank
Another reason to consider how the BFP is administered is the temporary lag in how it responds to changes in global petrol prices, given that prices at the pumps are generally updated monthly in South Africa.
“This is theoretically accounted for through the Slate Levy, but it is an imperfect solution because consumers purchase petrol at intervals that differ from the monthly adjustment, and could pay more or less than prevailing market prices based on when they have to refill their cars, particularly during periods of substantial price instability,” said the SARB.
Global benchmarking indicates that other countries update fuel prices on a more regular basis than South Africa, often releasing new prices every two weeks.
“Given that the calculation of the petrol price is a relatively mechanical process, it would be viable for the DMRE to increase the frequency with which prices are adjusted,” said the SARB.
This would require additional work on the part of retailers, but would improve the responsiveness of the fuel price and reduce the burden on the Slate Levy to adjust for short-term imbalances.
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