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Fuel prices hit the late 20s this week as the prices of petrol and diesel were hiked sharply to new highs for July, with fuel now about 50% more expensive that it was a year ago.
High global crude oil prices in June were one culprit (a depreciating rand was another), but the big shock came from the halving of the R1.50 subsidy that government granted earlier this year. Nor can a reprieve be expected next month, when the subsidy — essentially an exemption from part of the fuel levy — is due to be removed altogether.
Nor is the outlook for oil that encouraging. Brent crude was trading this week at about $106 a barrel, which is off its June high of more than $120. But it’s still about 35% higher than a year ago — and as recently as December it was trading in the $60 range.
Tragically, there’s little sign that the war in Ukraine will end soon, so sanctions on Russia will keep oil high for a while yet. How high is the subject of much debate among the experts. The US’ Energy Information Agency expects Brent crude to average $108 in the second half of the year. Global investment bank Citi now expects it to average $98 for 2022, projecting that the price could fall to $65 by year end if a global recession slashes demand for oil. Against this are doomsayers who see oil going to $200 or more in a worst-case sanctions and war scenario
Even if global crude gets cheaper, domestic fuel prices depend as much on the fortunes of the rand exchange rate, which is already more than 12% weaker than a year ago and is expected by many to weaken further this year.
For now, fuel prices are a major driver of higher inflation, here and around the world. If fuel prices were to stabilise, even at the current higher level, they would stop driving up the inflation rate (because the price would already be in the base). But they would still be taking a huge chunk out of the disposable incomes and spending power of households, who are at the same time contending with the more than 7% increase in electricity tariffs that kicked in at the beginning of July.
Add to that the higher food costs that inevitably follow when the price of transporting that food rises as far as it has, as well as higher interest rates and households will be under significant pressure. We are probably only beginning to see the “second round” inflationary effects of high transport inflation across the economy; the Reserve Bank can be expected to act firmly to stop inflation from spiralling, which itself will take its toll on demand and growth.
The fuel price crisis needs to prompt, first, a discussion on SA’s tax structure and how far it can or should rely on taxing fuel. Until this year, government had spent a decade implementing huge annual hikes to fuel taxes, which was a quieter and less controversial way to raise the large quantities of extra revenue it needed than hiking the VAT rate. Now taxes make up almost a third of the fuel price. Add all the other regulatory components and it’s more than half.
Which is why the second discussion SA should have is about the regulation of fuel prices. Research has shown that restructuring and deregulation could enable significant reductions in the fuel price. The department of mineral affairs & energy and the Treasury are looking at the complex issues involved. The DA this week added to the pressure, introducing legislation in parliament to deregulate the retail fuel industry to introduce competition and cut margins. The department has said it will deregulate but only gradually and with restrictions.
This is not just about pricing but about the whole structure and operating environment of SA’s fuel industry, wholesale and retail. Deregulation would have far-reaching consequences across the industry that need to be interrogated and widely discussed. It’s not necessarily a short-term solution to the crisis, nor should it be undertaken as a knee-jerk reaction. But there is no doubt that the decades-old regulation of the industry should be shaken up and modernised. If high fuel prices help to prompt that, it could at least be one upside.
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Published by Arena Holdings and distributed with the Financial Mail on the last Thursday of every month except December and January.