EDITORIAL: Slow burn of fuel price rise
The problem is it’s effectively an extremely regressive tax because the effect is mostly felt by commuters
The petrol price rose an extraordinary 71c on Wednesday, which makes the current price the highest it has been in South African history. You will now pay around R14.49 per litre for 93 octane petrol, which means it will cost just below R800 to fill an average tank.
The petrol price in SA moves on a mechanical basis in line with the oil price and rand/dollar exchange rate, but government levies on petrol have been used as a quick and convenient fillip for budget shortfalls.
Most recently, then finance minister Nhlanhla Nene plugged a hole in the budget in 2015 with an 80.5c increase in the petrol levy which would cost motorists around R17bn a year. The increase took the levy to 40% of the price, but with price escalations since then, the proportion is now about 39%. Either way, the levy is now at European levels and the petrol price is among the highest in the world. In the US, for example, motorists currently pay about R7.30 per litre.
Nene chose to increase the levy because at that time the oil price was comparatively low, so the hit on the economy would be subdued. But, as the old saying goes, it’s only when the tide goes out that you can see who is wearing swimming trunks. The effects of stop-gap measures imposed yesterday are now having their effect, which was entirely predictable.
In some ways, local motorists are in the hands of a stand-off between the world’s last remaining cartel, Opec, and US shale producers
The problem with a higher petrol price is that it is effectively an extremely regressive tax because the effect of the rise is mostly felt by commuters. Millions of people who live in SA’s townships travel long distances to work, most often by minibus taxi, and they carry a large slice of the burden.
This is not the only place the economy is wounded. Petrol price rises tend to have an inflationary effect because transport is such a ubiquitous part of the cost of almost every physical commodity. It ripples through the economy from the base up, pushing up prices everywhere.
At the moment, it is subdued mostly because the economy is not charging ahead. But this too will one day change and at that point, the latent effects of the price rise will hurt.
In some ways, local motorists are in the hands of a stand-off between the world’s last remaining cartel, Opec, and US shale producers. The cartel in this context is the heavyweight champion and the shale producers are bantamweights.
Saudi Arabia, one of the world’s largest and lowest-cost producers, decided to increase output in 2015 partly in order to reduce stockpiles that had mounted during the long economic downturn, but also with an eye to drive the shale producers out of business. The result was the lower oil price that allowed Nene to increase petrol prices, without, he thought at that time, doing major damage to the South African economy.
But oddly, the shale producers found ways to stay in business, and Opec has struggled to keep the price of oil down mainly because the world is going through an unusual phase of synchronised economic growth. The result is that the oil price has gradually risen to about $60 a barrel, which is more or less what it was when the whole production increase began in 2015.
Opec has not given up its production price increase and it is lobbying members to keep production high for 2018, although notable producers appear to be less enthusiastic about the effort than they were. That goes to show that even the toughest heavyweights sometimes don’t have it all their own way.
For South African motorists, the bad news is that these problems are unlikely to go away soon. From 2009 to 2014, the oil price ranged between about $80 and $100 a barrel, so speaking historically, it seems likely to be drawn to around these levels.
There are some mitigating factors. Electric cars and environmental pressure could eventually reduce petrol consumption, but that’s unlikely to have any major effect anytime soon. The real lesson for SA is that quick-and-easy boosts to the budget never end up that way. Eventually, the bill comes home to roost.