Sat, 02 Jul 2022

What's driving the surge in South Africa's fuel price

The Conversation
19 Jun 2022, 18:39 GMT+10

Increases in the domestic price of fuel are big news in South Africa, with the price of petrol, diesel and paraffin reaching new highs. The underlying reason for the price increases is movements in the international price of crude oil. The acceleration in the international price of crude oil is linked to the Russian war in the Ukraine.

The expectation is that the crude oil price will remain at an elevated level for the duration of the war.

Internationally, crude oil is priced in US dollar per barrel. Recently the price exceeded US$120 per barrel. This is not the highest level ever for the crude oil price. The highest ever nominal historic level of US$147.02 per barrel was reached on 11 July 2008. On that occasion the price of crude oil increased owing to military tension about Iran. Adjusted for inflation since 2008, this amounts to some US$200 per dollar in current values. There is therefore room for further increases in the price of crude oil.

The crude oil price in US dollar is determined by international forces of supply and demand.

The international oil price pressure leads to higher landed cost for fuel in South Africa. The landed cost in US dollars is converted to rand at the prevailing exchange rate. Any weakness in the rand exchange rate against the US dollar therefore results in a higher domestic petrol price.

Political and economic stability to ensure a stable (or even appreciating) exchange rate is therefore of the utmost importance in the strategy to contain the domestic fuel price.

Once the domestic base price for fuel is determined, a variety of levies, taxes and margins are added to calculate the pump price that the consumer pays. In an attempt to alleviate the impact of the increase in fuel prices, the government has waived some portion of the fuel (tax) levy as a temporary relief measure.

However, this cannot be done on a permanent basis, given the precarious fiscal position of the government. Any permanent reduction in the government's fuel levy will necessitate an increase in other taxes raised by the government.

There is, however, one charge in the cost structure of the fuel price that can be reconsidered. This is the merchant service fee banks charge for the use of debit and credit cards. Admittedly, any reduction in this fee will impact negatively on the gross revenue of banks, but will also reduce the cost of filling station operations.

What goes into the fuel price

The fuel levies include transport to inland provinces, thus explaining the difference in the fuel price between coastal and inland regions. These levies are fixed and subject to periodic revision.

The most important are government's fuel levy (about 20% of the retail price) and the road accident fund levy (about 11%). These levies apply to both petrol and diesel.

Another important levy is the gross margin allowed for filling station operators. This levy amounts to some 10% of the retail price of petrol, while it is determined through retail price setting per filling station in the case of diesel sales. Filling station operators determine their gross margin on their diesel sales, as only the wholesale price is regulated.

To soften the blow of higher fuel prices for consumers, the South African government decided to waive some portion of the fuel levy as a temporary relief measure. However, this measure is not sustainable, as government revenue is eroded.

The retail levy on petrol accruing to the operators of filling stations is currently R2.29 per litre. But this is not the profit per litre of petrol sold at retail level.

This retail levy of R2.29 includes 87c per litre for the remuneration of pump attendants and other administrative staff members at filling stations. South Africa has about 5,000 filling stations where some 60,000 pump attendants are employed. In addition, it is estimated that these filling stations employ some 15,000 to 20,000 administrative staff members.

If the petrol price is deregulated and the margin for the remuneration of these staff members is removed, South Africa might lose as many as 80,000 job opportunities. Given South Africa's official unemployment rate of 34.5% , this increase in unemployment can't be afforded. In addition, the cancellation of this wage levy on petrol will reduce the price by only about 3.6%.

The retail levy also provides for site rental of filling stations in instances where sites are not owned by the operators. After the deduction of the rental allowance of 75c per litre and the allowance of 87c per litre for staff costs, site operators are left with 67c per litre. This is their gross revenue and is used to cover other costs such as municipal services, bank charges, other overheads and professional fees. Whatever remains, is the net income of the fuel station operator.

One important cost item that is not provided for sufficiently in the fuel levy structure, is the merchant service fee charges of the financial services industry on payment for fuel by credit and debit cards. Until 2009, South Africa allowed fuel sales only by means of cash or debit card, but this changed with the addition of credit cards as a payment instrument for fuel as one of the preparatory measures for the country's hosting of the World Soccer Cup.

The use of debit and credit cards comes at a cost for fuel station operators. This merchant service fee differs for debit and credit cards, and also differs between banks and card service providers. On debit cards the merchant service fee is in excess of 0,5% of the transaction value, or more than 12c per litre. On credit cards this fee [amounts to as much as 1,75% of the transaction value](https://www.iol.co.za/business-report/economy/sas-latest-fuel-hikes-benefit-financial-service-firms-like-visa-and-mastercard-says-fuel-retailers-association-53bd26f3-84c6-4fae-a2e2-d57ed013a4e1 as much as 1,75% of the transaction value (credit card interchange plus bank commission), or some 42,3c per litre at inland filling stations.

This merchant service fee is also the only component in the fuel retail value chain that increases automatically when the fuel price increases, as was the case in recent months.

Admittedly, this fee will also decrease when the fuel price declines.

In the quest to find alternatives to reduce the retail price of fuel, one strategy is a revision of this "invisible" fuel levy charged in the form of the merchant service fee.

Author: Jannie Rossouw - Visiting Professor at the Business School, University of the Witwatersrand The Conversation

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