PODCAST: Conversation with Tumisang Ndlovu on POWERBusiness is a good place to start. The purpose of this post is to explore the price hike narrative from various angles without being too technical.
At the heart of much of the dynamics in the long term, petroleum price volatility is consistent with the notion of “peak-oil”. Theoretically, peak-oil refers to the point at which fossil fuel discoveries contract, and million litre volumes may grow, but at a rate that is slower than before. We have exhausted this avenue of energy, and the exponential growth in electric vehicle manufacturing, and lower unit costs is going to be crucial. Anyway, I’ll dive into this black muck between passenger and consumer dynamics in a general view — nothing too specific, just highlighting how dirty the situation is. It does seem obvious that from a transport policy perspective, this is one of those few years when policy certainty from the transport side might actually impact on the broader market. Oh, why are fuel prices going up this time? Partly because the Rand/Dollar exchange rate hit harder than the improvement in prices; another part is because we’re in the post-peak-oil era, and prices need to rise as macro-scale scarcity increases.
Almost everything Miyelani Maluleke said in January 2018 seems to be becoming true.
Passenger transport dynamics
Fossil fuel is consumed by various sectors in the transport economy to move passengers and freight, as a result the potential impact of changes in fuel prices are two sided — and may not reflect immediately.
“Private car users in central business districts are probably better off using public transport modes that seem reasonable to them, and have a dedicated right of way — meaning they do not interact with traffic throughout the journey.”
Public transport users
Public transport users for example, may be exposed to a greater likelihood of increased commuter prices in different regions depending on the associations — this includes scholar transport operators. However, there is a reluctance to increase minibus taxi fares or any public transport fare more than once a year. The impact is direct in terms of subsidy allocations for fossil fuel based bus operators, the bill may well increase and tax payers will foot it possibly due to the welfare gains offered by bus transport in terms of pecuniary affordability — not accessibility per se. It is becoming clearer that few operators can truly afford to maintain their services, keep prices low and offer viable services in the long-run as energy increases persist — both the integration of Commercial Transport Applications to enhance efficiencies for all modes, and changes in energy sources are due. Another interesting entryway to reducing the fuel footprint — may be to explore the use of partnerships between employers and transport service providers. This could be based on relationships that employees living in similar neighbourhoods could galvanise or long term contracts between operators and employers. While this may sound abstract, it is a viable alternative to provide a balanced solution that enables operators to be viable in a regulated manner and users the opportunity to enjoy safe, secure and truly affordable services.
Private car use — not ownership
Private car users who make local or regional trips are exposed to compound increases in wear-and-tear repair costs, toll price hikes — but those with newer vehicles probably enjoy lower fuel consumption per 100km. This is particularly important as the increase in 1 litre engines becomes ever more justified their import tariff base may need to change in the medium term. Driving habits that may be adopted are already being adopted and a number of articles make these fuel saving skills easily accessible. However, at a regulatory level, higher costs of fuel may initiate changes in acceleration, higher driver concentration and potentially less frequent driving to the extent that some studies suggest that road accidents may decline as well. Private car users in CBDs are probably better off using public transport modes that seem reasonable to them, and have a dedicated right of way — meaning they do not interact with traffic throughout the journey. Where land-uses permit, using non-motorised transport is a crucial avenue to simply avoid the costs in general. There are other approaches to managing travel demand in general, but the basis of modal shifts at least for some days, or some modes, lays in the availability of an alternative. Higher quality passenger rail would benefit greatly from higher fuel prices, but we are in many ways missing the opportunity to lock in the benefits. However, there are alternatives that highlight that there is a change in the ownership and use dynamic: should you own your car if its only used for a small portion of the time it is owned? [lots of blogs and publications on this topic] Probably not. Transportation network companies, shared-ownership platforms may well turn these norms around depending on the country’s behavioural dispositions and brand adoption rates for the service.
Airport ground prices — could flights get more expensive?
According to IATA, Middle East and African aviation markets on the other hand seem to be looking forward to both increases in passenger volumes, and declining jet fuel prices contracting by nearly 8.4% between 22 June 2018 and 22 May 2018. But 2nd Quarter air cargo results reveal that while the global air freight economy may be contracting, available freight-ton kilometers in Africa increased from 11.2% to 25.8% between 2017 and 2018 — intimating huge capacities available for high value final product consignments at possibly lower unit costs. These are important indicators as airport ground operations are largely driven by various types of vehicles consuming petroleum products, and increases in energy prices may also impact the day-to-day cost of operating airports that are not hedging petroleum prices. I can’t tell if flights are going to get more expensive, but the evidence points toward the opposite direction.
Consumer spending dynamics
“Consumers may well feel the cumulative impact of the additional transport costs along the supply chain that produces most goods.”
The Living Conditions Survey of 2015/16 reveals that 32.2% of household spending is on housing, water and energy. This is followed by transport (16.29%); goods and services (14.68%); and food stuffs and tobacco (13.75%).
Macroeconomy and freight transport issues
The SARB Quarterly Bulletin reveals that the South African economy contracted by 2.2% across all sectors excluding the tertiary sector. Primary and secondary sectors such as agriculture, mining and manufacturing are depended on transport efficiencies, but they have contracted by 24.2%, 9.9% and 6.4% in terms of real gross domestic product. Similarly commodities these sectors account for 58% of the R 38bn in freight transport income during February and April, according the Land Transport Survey. The income base is dominated by mining and quarrying which accounts for R14.2bn — the remaining R 2.9bn and R 5bn are incomes from agriculture and manufacturing respectively. The freight market is split between road (75.7%) and rail (24.3%) in terms of million-tons, as road dominates so does the cost exposure to energy price volatility, especially when fuel prices increase consistently in Rand terms.
Fuel price hikes are not a household spending issue anymore, they are a matter of national priority impacting everyone, sector and market — we need to jump this ship without drowning.
This exposes consumers more acutely to the benefits of door-to-door/supplier-to-supplier distribution in a short space of time, but at the cost of being exposed to volatility in the fuel price. The Supply Chain Barometer indicated that 60% of the costs reported for road freight are related to petroleum, while railways do spread the cost-per-kilometer extremely thin over viable distances [can someone clarify the accuracy of this number — seems huge?]. In the last Logistics Barometer logistics (2016) costs as a percentage of GDP were declining — purporting a growing economy and or shrinking logistics costs while the transportable share of the economy was rising.
A road oriented economy reaches into the consumer’s pocket somehow
All this reaches the consumer that may be cushioned by affordable debt. Transportation costs, however are part of a network of path dependent impacts placing upward pressure on the average cost across the value chain and thus CPI, extending the cycle of exposure to volatile affordability. In particular, 1st Quarter SARB results indicate that real final consumption expenditure by households is up by 1.5%, but it is dominated by non-durable goods (1.2%) and services consumption (4.2%). With 2016 as 100, the CPI for non-durable goods was 107.9 and services was 108.4 for May 2018-. These goods experienced the highest year on year change in CPI of nearly 4.6% and 5.3%, respectively. In other words consumers are turning to spending on the type of goods that are most exposed to inflation in the 1st Quarter of 2018 than in the 4th Quarter of 2017.
Bad examples: car sales and agriculture
Durable and semi-durable goods consumption has contracted by 0.6% and 6.7%. Durable 50% of the durable goods are transport equipment — and the consumption pattern is declining on a month-to-month and in some cases year-on-year basis. For example NAAMSA vehicle sales for May-April 2018 reveal a decline of just over 17% in vehicle sales month-to-month, but a 2.4% contraction year on year. June flash results don’t look good at all, year on year growth is slowing down, whereas it this Quarter is expected to be looking better. In the Flash Results Commentary, its rather evident that the outlook is positive, but slower — especially in the face of changes in US policies in terms of trade. Consumers are not buying more cars? I can’t tell. Another example is in the decline in year on year percentage change in freight transport income from agriculture, forestry and primary products declining from 19% y/y to 9.6% y/y between November 2017 and April 2018 — foodstuff demand should not change unless if there is a substantial decrease in seasonal availability of a commodity or population declines. Are we not producing as much as what we used to? It all seems seasonal and temporary.
All of these are symptomatic of a struggling consumer market, leveraging on debt and non-commensurate increases in incomes — although a burgeoning opportunity to earn extra income in the digital economy. There are different types of consumers that will be affected by the hike, in different ways and across various dimensions of their consumption basket. Households need to budget more deeply, not just in terms of transportation costs, but in food baskets, spending patterns, domestic product consumption and pursuing other avenues to raise additional incomes.
That aside, it is about time that policy certainty in the transport economy comes to light. A direct, clear and robust position that is not a headline vision — but a tangible vision that everyone can hold a torch to, and keep it lit. Fuel price hikes are not a household spending issue anymore, they are a matter of national priority impacting everyone, sector and market — we need to jump this ship without drowning.
Where else do these comments appear?
Fin24: July 3, 2018 How to save on the fuel price hike? Try not driving by Lameez Omarjee
Fin24: May 17, 2018 How the rising petrol price will affect your pocket by Tehillah Niselow
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