SANISHA PACKIRISAMY: Fuel levy drop a much-needed breather for struggling consumers

The government’s move to soften the impact of sky-high oil prices is vital — but it hasn’t gone far enough.

Even before Russia invaded Ukraine, oil prices were rising, partly because of the surprisingly fast pace at which the global economy rebounded after Covid.

Sanctions against the Kremlin were always going to push up prices further, given that Russia processes 10.5-million  barrels of crude oil per day, making it the third-largest oil producer after the US and Saudi Arabia. 

SA might not be particularly dependent on Russian oil, but we’re still hostage to the interconnectedness of the global energy system. As a result, soaring oil prices have manifested at our petrol pumps, and burnt a hole in the pockets of SA’s already-battling consumers.

Over the past year, for example, SA’s fuel prices have risen by an annual average of 25% which, when combined with the 11% hike in electricity prices, has pushed “administered prices” — set by the government — up by 14% over the past year.

Of course, the oil price is outside any government’s control, but states across the world face increased pressure politically to do something about fuel prices — either by cutting fuel taxes or slashing public transport fares.

In SA’s case, finance minister Enoch Godongwana surprised many last week when he opted to cut the general fuel levy by R1.50 for two months. Two other measures — cutting the basic fuel price by 3c a litre and removing the 10c a litre demand side levy for inland regions — are expected by June.

It’s a welcome reprieve, but the government needs to go further. What’s really needed to reduce costs in the SA economy in the long run is a comprehensive review of the fuel price.

As it is, general fuel levies provide up to 6% of all tax revenue collected in SA. But these levies have risen 121% over the past decade — far faster than the 63% rise in the wider inflation index. Another tax you pay every time you buy petrol is a levy for the Road Accident Fund, and this has also risen 173% over 10 years.

That alone should tell you why we need to re-examine how our fuel prices are regulated.

In 2020, economist Heinrich Bohlmann and energy expert Rod Crompton wrote a report examining fuel price regulation under a Southern Africa – Towards Inclusive Economic Development project workstream. 

Their conclusions were that the fuel price is padded with excessive margins, and the methodology hadn’t been updated. 

They calculated that were this to be corrected — using a more appropriate margin, for example — the fuel price could be cut by 103.8c a litre. And if that were to happen, SA’s economic growth would be 0.69% higher, while the price of fuel at the pump would be 6.6% lower.

Importantly, such a fuel price cut wouldn’t lower employment in the wider economy, as the higher economic growth would create new jobs elsewhere.

Bohlmann and Crompton warned that specific concerns — a desire to protect jobs in the fuel sector and promote small businesses — were preventing a shift to more competitive market pricing. But they stressed it would be important to shift petrol price regulation to an independent regulator, or commission, rather than the government. 

Others in the chain are also considering ways to mitigate high fuel prices. 

For its part, the department of mineral resources & energy has proposed investing in local refining, encouraging energy exploration, supporting a shift to biofuels and imposing quotas on diesel exports to reduce SA’s reliance on the global fuel supply chain. 

The state-owned Council for Scientific and Industrial Research (CSIR) has also suggested a faster shift from road to rail and an improvement in public transport (the transport sector uses 70% of petroleum products in SA).

It couldn’t come soon enough. As it is, power remains at the heart of SA’s financial woes — and it won’t help that, according to the CSIR’s calculations, Eskom has already used 130-million litres of diesel this year to offset electricity shortages, far more than initially bargained for.

This expensive diesel is likely to hurt consumers’ pockets further, as it will inevitably translate into more pressure to hike electricity tariffs.

As it is, energy is playing a huge role in pushing up SA’s inflation and reducing consumer purchasing power. For the sake of poorer black communities, already struggling with the legacy of apartheid spatial planning, we can’t afford to wait any longer for a proper examination of the fuel price. 

* Packirisamy is an economist at Momentum Investments