EDITORIAL: Fuel price cap blown away
Motorists are still going to cough up more, making up for the deferred pain
It was obvious from the start that the government’s intervention in September’s fuel price adjustment was not going to end well. So it has come to pass, with motorists facing a hefty increase this week, which could be more than R1/l, taking the price above R17/l.
It is still not clear what energy minister Jeff Radebe was trying to achieve when he capped the fuel price in September, in a move that some economists condemned as illogical and dangerous. That kind of populist move would be understandable coming a few weeks before an election. At least then one could detect some logic, even if one disagreed with the move.
On September 3 the department said it had taken the step, which meant the price rose by 5c rather than 25c, because SA had "witnessed sustained increases in fuel prices for the past few months" — as if that had never happened before. Brent crude jumped to $100 in 2014 and there was no intervention then.
The move, the first since 1990, came as the government came under pressure to do something about surging prices at the pumps. The opposition DA, jumping on to the populist bandwagon, in July called for a drop in the fuel levy and endorsed protests against fuel increases.
This kind of haphazard policymaking does the country no favours. It also complicates the work of the Reserve Bank as it seeks to work out what the appropriate interest rate for the country should be.
It does not seem to matter that the biggest drivers were international oil prices and the rand’s depreciation, factors that the government can do very little about. The cap in the price increase, which was estimated to have cost R500m, was due to be funded from the slate levy account, which balances out underrecovery and overrecovery of the price paid by consumers with the daily fluctuations in the oil price.
So it seemed the government decided that on top of its other functions, very few of which it does well, it was going into the business of speculating in the energy and currency markets.
The idea was that this "once-off" intervention could be corrected at a later stage by, for example, not passing on lower prices to consumers when the oil price was lower and the rand was stronger — a dangerous bet that is never going to prove sustainable as there is a danger that the prices can move in the wrong direction for a long time.
Well, since that adjustment in early September, Brent crude, which is priced in dollars, has gone up about 6%. On the positive side, the rand, which had been on a downward trend since late July, has stabilised and gained just over 5% since September 3.
But that rand strength is not going to translate to any relief for motorists, who are still going to cough up more, also making up for the deferred pain from September.
The latest move will mean an extra R2.5bn a month spent on transport costs throughout the economy, the Automobile Association has estimated. Strangely, the government had not confirmed the scale of the increase by Sunday, though it is due to come into effect early this week.
This kind of haphazard policymaking does the country no favours. It also complicates the work of the Reserve Bank as it seeks to work out what the appropriate interest rate for the country should be. The last decision on rates was a close thing, with the monetary policy committee voting 4-3 to keep the repo rate unchanged. Although the argument can be made that inflation is driven by external factors that are not subject to monetary policy decisions, the odds of a hike later in 2018 are increasing.
The Bank likes to stress that policy is forward rather than backward-looking and therefore the most important thing is not the level of the fuel price today but the extent to which that informs consumer and employer inflation expectations. If the Bank shows it is willing to tolerate or accommodate faster inflation that could make things worse, encouraging consumers, workers and producers to expect and demand higher prices.
Even with a weak economy that is slowing consumer spending, higher interest rates could be on their way.
So it is not clear what Radebe and his officials thought they were trying to achieve with their petrol price stunt. What is clear is that there will be no meaningful relief for the country.