261 | What if the fuel price breached R18 a litre for a few months?

For the fuel price, we are always in a sauce, always playing catch-up. If brent crude prices are high, and our currency is weakened then we can buy less oil. This means, that the following month’s prices under-recovered the actual volume demanded at a specific price throughout that month. 

So fuel price increases in this current month, are actually an effort to catch-up to last months’ estimation. 

This month is no different, other than the fact that we are inching closer to crossing the R17 per litre mark in petrol which should remind us of our price trajectory toward the end of 2018. 

In June, product prices and exchange rate impacts were 5:3, the market effects between then and December 2018 were contained by the Slate Levy Mechanism which kept the fuel price stable at and below the R17 mark. Both weakening exchange rate and commodity price changes drove prices higher by almost R1, with a 5:4 negative ratio. 

Even when the exchange rate and commodity prices began to improve leading toward October, fuel prices held at the R17 mark because the Slate Levy Mechanism was about 22 cents per litre then. This reflected the price consumers paid for being cushioned during the rising 2018 geopolitical situation in Iran and Venezuala driving fuel prices to $70 per barrel, for a brief period. OPEC+ stepped in to contain the market’s imbalance to return prices closer to the $50pb

Fuel levies will be increased by 27 cents per litre, comprising 15 cents per litre for the general fuel levy, 11 cents per litre for the Road Accident Fund levy and 1 cent per litre for the carbon fuel levy.

Minister Tito Mboweni: 2021 Budget Speech

Why the “surge” this year? 

Commodity prices are increasing due to a number of factors. One of them is the fact that there is an expectation that demand for oil is set to rise as travel returns to normal levels after June-July. This will require increased production, and OPEC+ are gradually increasing monthly production to gear up and to erode an excess supply stored—this is still below their reference production levels

For South Africa, the primary driver is the commodity price shifts contributing 60c, or a 6:1 ratio with the exchange rate. Another driver are the fiscal decisions to increase the fuel levy (16c) and the Road Accident Fund levy (11c). The ratio is acute, signalling that the strength of the Rand is not an issue—unless if it’s expected to keep up with market volatility. 

The fuel price is not really surging, however. What we are seeing as an increasing rate of increases between January and now. Mid 2020 would have seen an almost R2 increase in the fuel price to about R15, that was steep. What we are seeing today is a “natural” course given the trend the last few months. 

What if we breached the R18 mark?

Will we exceed the R17 mark? We did in 2018, for a brief period. First of all it would be chaos at the pumps, and the fuel tanks sold at major outlets would run out of stock in some areas. That additional Rand beyond R17 would send alarm bells going. But I doubt that would be the case, only at R20 would general consumers really hammer on the full tanks—very unpredictable.

The South African economy in my view cannot sustain itself at that level for more than three-months in a normal year: the inflationary effects would be too significantly compounded by the time it reaches the consumer’s plate. 

When we have such situations, transport costs dominate the Consumer Price Index by accounting for almost 70% of the change in the index. 

In other words, if for commodity price volatility reasons we breached the R18 per litre mark for three consecutive months the impacts would be immediate for road users who pour petrol. 

The effect would take some time to reach the price of bread, juice and shoes, for example—but it would reflect the change in rates offered by the diesel fuelled operators who would probably be exposed to 65% of the R18, albeit the same rate of increase. 

Thank you for reading.

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