How Jeff Radebe's fuel price intervention could backfire
The energy minister has given motorists a reprieve, in a move one economist calls 'illogical and dangerous'
The government will spend at least R500m to finance the shortfall in fuel prices in September, energy minister Jeff Radebe said on Tuesday.
The fuel price had been expected to rise 25c a litre on September 5, partly due to wage increases for petrol attendants that comprise an element of the price. Due to ongoing and sharp escalations in the price, the government capped the increase at 5c a litre on Monday.
It is the first time since 1990 that the government has contained fuel price increases.
It comes after trade unions and opposition parties pressured the government to act on the record-high prices.
The shortfall will be funded from the Slate levy account, which balances out underrecovery and overrecovery of the price at the pumps with the daily fluctuations in the oil price on the market.
It is administered by the Central Energy Fund, a 100% state-owned company.
Radebe said that he had signed permission for the surplus funds to be used to fund the shortfall.
Econometrix chief economist Azar Jammine said the temporary fuel price freeze was “illogical and dangerous”.
“The cost to the department will amount to over R575m on this occasion and it begs the question as to how this shortfall will be made up in the future,” Jammine said.
“Possibly the government is relying on oil prices to drop back and the rand-dollar exchange rate to strengthen in the hope of making up the shortfall in due course by not reducing fuel prices when they ought to be reduced,” he said.
“However, such a procedure is a gamble, especially at this point … when the exchange rate depreciation and rising oil prices of the past week has now created an underrecovery of no less than R1.10 a litre for next month, should current levels of the rand and oil price remain in place for the rest of September.”
Rising oil price, weaker rand
In addition to rising fuel levies and taxes, fuel prices have been affected by a rising oil price and weakening rand.
Oil prices are up nearly 20% over the past six months, while the currency has weakened nearly 30% against the dollar over the same period.
Energy department officials said the bailout was a “once-off” and was unlikely to be repeated. There was about R1bn in the fund and the adjustment is expected to use up at least half of that amount.
“We thought given what is happening in the economy, we could do this as a once-off,” deputy director-general in the department Tseliso Maqubela said.
“Under ordinary circumstances oil prices begin to drop from September as it is the end of the driving season in the US.
“However, the pressure on the rand as well as adverse weather in the Gulf of Mexico, which has been closing rigs, could mean we won’t see those benefits. So the situation is challenging and this really is a once-off. That is how it should be seen,” he said.
Maqubela is also involved in a task team with the National Treasury established by President Cyril Ramaphosa to look at ways of managing the record-high fuel price, which reached R16 a litre in August. In addition to the impact on travel costs, rising fuel costs also contribute to an increase in consumer and producer price inflation.
“This [once-off adjustment] allows the process between the National Treasury and the department to go ahead. But … that is also a difficult process,” Maqubela said.
The task team has been asked to report back to Ramaphosa at end-September.
The DA is campaigning for a R1 reduction in the fuel levy, which makes up R3.37 a litre of the fuel price.
The fuel levy is a tax that contributes R62.8bn to the National Revenue Fund, ostensibly to help fund the maintenance of the roads network.
The basic fuel price only accounts for about 47% of the overall price per litre, with distribution and storage costs, taxes and levies, and retail and wholesale margins making up the remainder.
Correction: September 5 2018
An earlier version of this article, citing Bloomberg, said this was the first time since the early 2000s that the government has contained fuel price increases.