Picture: REUTERS
Picture: REUTERS

The energy department has indicated that it is considering setting a maximum allowable price for 93-octane unleaded fuel as a relief measure to provide relief from the unrelenting petrol price increases of recent months. A warning though: price controls consistently lead to unintended consequences far worse than the problems they are supposed to fix.

The fuel price in SA is already controlled. Our fuel price differs only between the coastal and inland provinces. In other countries, you could be paying a different price at every petrol station you visit because they leave it to the market to determine the price of petrol, instead of leaving it to the government.

Generally, the government raises (and more rarely, lowers) the fuel price based on what it often wrongly thinks the market wants. If, however, the government goes ahead and implements a regime whereby 93-octane petrol will no longer be allowed to go beyond a certain price, it will distort the market even more than it currently is.

This is how a market deals with resource scarcity: comparatively scarce resources are more expensive, and comparatively abundant resources are cheaper

A price is not only a guide in measuring the value of a product, it is also a signal, arguably the most important signal in any modern economy, of the scale of demand.

When a sought-after good has a low price, it indicates to consumers whether there is a big supply of that good and that they can buy it in vast quantities. When it has a high price, consumers are told there is a limited supply, and that they should be conservative when purchasing it.

This is how a market deals with resource scarcity: comparatively scarce resources are more expensive, and comparatively abundant resources are cheaper.

As economist Ludwig von Mises wrote, “The government's interference with the price of a commodity restricts the supply available for consumption. This outcome is contrary to the intentions which motivated the price ceiling.” Von Mises concludes: “The government wanted to make it easier for people to obtain the article concerned. But its intervention results in shrinking of the supply produced and offered for sale.”

Price controls interfere in this market price mechanism. While we might all wish scarce goods were more affordable, the market is warning us that if we too liberally buy that product, a shortage will result. The higher price forces us to think twice. When the government, as an unproductive, non-economic actor, steps in and artificially forces a price floor or price ceiling, the market is no longer capable of sending relevant and timely signals to consumers. Thus, when circumstances in the Middle East cause oil supplies to drop, or transportation to other regions to be more onerous, the price of fuel will be higher.

With a price ceiling enforced, the fuel we have will fly out of the pumps and, eventually, not be replaced as the cost of new supplies will not have been covered.

Eliminating levies

There is a way, however, for the government to drastically reduce the fuel price without interfering in necessary market processes. Forty percent of what we currently pay for fuel has nothing to do with fuel, and everything to do with politics. The general fuel levy, ostensibly employed to maintain and build roads, and the Road Accident Fund levy, which funds a bankrupt and collapsing institution, are what makes our fuel about R6.74 a litre more expensive than it should be. If the government eliminated these levies we could be paying R10.11 for a litre of 93-octane unleaded right now — no price control needed!

But, it is highly unlikely that the government will eliminate these levies. It seems the onus is only on us as citizens to “tighten our belts” while the government continues to spend more and more of our money on an ever-growing state bureaucracy. President Cyril Ramaphosa recently went as far as to announce at the jobs summit that there will be no job losses in the public sector, at a time when our economy desperately needs a drastically smaller and leaner civil service.

South Africans should be careful about welcoming more proposed government interventions in the economy when they  are aimed at correcting a problem caused by other government interventions. Instead, we must insist that the government remove itself from the economy. A growing, vibrant, and free economy will be the inevitable result.

• Van Staden is a legal researcher for the Free Market Foundation.