The rising cost of fuel is an important topic for South Africans, with the fuel price hitting record highs in July 2018 with significant economic ramifications for consumers, businesses and the economy. In this article we provide perspective on the different components of the fuel price and our thoughts on a more sustainable approach for the future.
What are the different components of the fuel price?
- (750,07c) Basic Fuel Price. The price the South African government pays to import fuel from overseas refineries to our ports, which includes Free-on-Board (FOB) and average freight rates.
- (34,5c) Storage, handling and distribution. The cost of secondary storage after fuel has been successfully offloaded at South African ports which includes demurrage, cargo dues, costal storage and stock financing costs.
- (337c) Fuel Levy. A general tax imposed by Government on fuel, which increases in April each year.
- (0,33c) Petroleum products levy. A levy collected by manufacturers and importers of petroleum products from the regulated petroleum product prices to be sold in South Africa included in the price structures of fuel and diesel.
- (10c) Demand-side management levy (DSML). A levy introduced in 2006 to discourage the use of ULP 95 fuel in inland provinces.
- (193c) Road Accident Fund (RAF) Contribution. A contribution towards a state-managed fund which covers the cost of third-party victims in road accidents.
- (0,2c) Fuel pump rounding.
- Zone Differential in Gauteng (51,7c). South Africa is divided into different zones based on distance from the closest port. Being based in-land, the fuel price in Gauteng reflects the additional distance fuel must travel to service stations.
- Wholesaler and retailer required margins (34c). Regulated by the Department of Energy (DOE).
- Fuel attendants. In the RAS Matrix, a margin of 187,2c includes an allocation for petrol attendants, forming part of Opex. When the petrol attendant's wage increases, government has to increase this component which ultimately affects the price at the pump and is absorbed by consumers.
Fuel prices are adjusted on the first Wednesday of every month and are calculated according to a 'formula-based pricing adjustment mechanism'. This mechanism is based on the Import Parity Principle (IPP) - what it would cost a South African petrol importer to purchase the petrol from an international refinery, transport the product from that refinery, insure the product against losses at sea and land the product on the South African shores.
Did you know?
- Service stations collect more than R78 Billion per annum excluding R23 Billion for RAF, making it one of the major tax collectors for government.
- A service station owner does not collect all the money, only the retailer margin. (Of the R16.02 pump price, the service station owner makes an average of R1.25 after deducting relevant RAS component due to the investor, the rest of the money gets split among the rest of the value chain). Learn more about RAS in our upcoming blog posts, available to CONNECT subscribers
PetroCONNECT's view on a more sustainable future
As a thought-leader in the industry, PetroCONNECT is proposing the following scenarios:
- A compulsory public liability insurance was introduced to all motorists which covers third-party road accident victims, managed independently, thereby replacing the Road Accident Fund. Although we have not done any thorough research in terms of what this insurance may cost, if we assume a premium of R100 per month, this could potentially result in a saving of R160 per full tank of 55 litres.
- The DOE revises fuel prices every 3 months, as opposed to monthly. Consumers will be in a better position to plan their disposable income, businesses will have more predictability on overhead costs and the approach will have an overall positive impact on inflation. For example, many small logistics companies must absorb the monthly fuel fluctuations and cannot easily include these costs into transportation overheads. The same goes for public transport, such as buses and taxis.
- A more relaxed approach to fuel taxes and levies which supports consumers with greater disposable income to either save or to put back into the economy. When considering the impact of potential deregulation and the proposed concept of public liability insurance, the overall impact on consumers and businesses could be significant.