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How the fuel price has been politicised

Oil companies shocked by minister’s intervention.
Was government's recent interference in the fuel price a once-off? In the name of 'policy certainty,' one hopes so. Picture: Shutterstock.

A crucial element of President Cyril Ramaphosa’s New Dawn is to improve policy certainty to create an environment conducive to investment.

However, it seems policy certainty is the very thing that was sacrificed when government intervened and absorbed a fairly moderate fuel price hike a month ago.

On September 3 energy minister Jeff Radebe announced that fuel prices for September would remain unchanged bar a 4.9c per litre increase in the retail margin for petrol to provide for wage increases for some petrol station staff.

The intervention applied to the prices of petrol, diesel, paraffin and liquid petroleum gas (LPG).

This means that somehow government protected the consumer against an increase of about 30c per litre.

Nevertheless, the prices were at record levels. The inland petrol price, for example, rose to R16.03 a litre in August from R11.24 in January. Coastal prices increased to R15.44 per litre from R10.83 at the beginning of the year.

Radebe did not disclose in his statement exactly how his capping of the fuel prices would be funded, save to say it was a “once off temporary intervention”.

Department of Energy (DoE) director for fuel prices Robert Maake subsequently told Engineering News that the intervention was to provide some relief while government finalised a longer-term intervention strategy. The strategy should be finalised by the end of September in line with a Cabinet resolution, he said.

At a background briefing to the media last week the South African Petroleum Industry Association (Sapia) shed some light on the mechanism the minister used for his intervention and what the consequences would be.

According to Sapia executive director Avhapfani Tshifularo, government did consult oil producers through this industry body before announcing the decision. Although Sapia apparently accepted the move, it is clearly very uncomfortable with the whole business.

To understand what happened one should first understand a mechanism called the Slate Levy Trust Fund.

This is a self-adjusting mechanism aimed at mitigating the possible under-recovery of fuel prices due to the difference between the average price oil companies pay for fuel on the international market and the revenue recovered from the retail market where government sets the price once a month.

The price on the international market fluctuates daily and it would be impossible to exactly match the average price industry pays during a specific period to the retail price charged during the corresponding period.

To mitigate the risk, companies are entitled to claim from the fund for such under-recovery and are compensated from it. There is, however, a lag of about a month and they are not paid interest.

The fund only deals with under-recovery, not with over-recovery.

When the balance of the fund dips to a negative R250 million, a levy is added to the fuel price to have it replenished. If the balance is too low to refund the oil companies, the claims remain live until the fund is replenished.

The mechanism was implemented in terms of regulations in 2009 and has worked well ever since, according to industry sources.

What happened in August is that the ministry convinced Sapia that there was money in the Slate Levy Trust Fund to refund oil companies for the under-recovery his decision forced upon them. This eventually amounted to more than R500 million.

On the face of it, nobody was prejudiced.

But it’s not that simple.

Clearly, the intervention would result in a lower fund balance that would have to be replenished at a later stage, most probably in November. In a rising oil price environment, this could result in another gigantic increase in that month, following the R1.00-odd expected in October.

And it goes beyond that.

As in any other industry, oil companies assess their risks before investing, and the frequency and extent of under-recovery would be a major factor in assessing such risk.

Having a transparent set of rules governing the fuel price makes it easier to take a view on this risk and it is on that basis that companies decide whether they will proceed with their participation in the local market or not.

What the minister did was to deviate from the rules and force an under-recovery when it should not have occurred in terms of the rules. While the companies would eventually be refunded, it does impact their cash flow and introduces additional risk – that of political interference.

Having a politician fiddling with one’s cash flow is a fact too ghastly to contemplate for any business.

Radebe did say this was a once-off, but the way the international oil price is going, and in the build-up to a crucial national election, he will be faced with much more compelling conditions to intervene in the coming months. The pressure from his cabinet colleagues could become unbearable. “Come on Jeff, you did it once before and it worked …”

A further complication is that the LPG suppliers and other importers of diesel and petrol are not part of the Slate Levy mechanism and there is no way for them to recover their lost revenue.

Whether Radebe’s intervention was even lawful can be seriously questioned. Even though the Petroleum Act gives the minister of energy the authority to set the retail fuel price, it is doubtful that he has any discretion to deviate from the rules that he set formally to exercise that authority. What he should do is change the rules if they have become inappropriate in his view.

Whether this really was a once-off, and what the “longer-term intervention strategy” might be, remain to be seen.

The fact is, our fuel price has just been politicised and an industry crucial to the South African economy has received a shock, with regulatory certainty making way for populism.

That is exactly what Ramaphosa promised would not happen in his New Dawn.

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The public should perhaps not cry for the oil industry.

The deemed price works off an assumption of buying product at Singapore, Gulf and the Med prices. It does not consider the actual price pad for product by the fuel companies from their own sources. The deeming then continues by allocating shipping, insurance, finance cost for time on the water, evaporation, spillage, piping it inland. Never mind that half of our fuel comes from Sasol and never saw a ship never mind spending a minth getting to SA, and a big chunk of the rest comes from BP, Shell, etc own oil sources and not the med or singapore or even the gulf prices.

The ACTUAL profit of energy companies derived from the BFP massively exceeds their deemed profit, especially in the case of Sasol.

Well said, that’s exactly what I suspected

Numbers please.

Pacaratac:
It is virtually impossible to get the truth about what say BP or Shell pays for their crude imports. It would be quite interesting to have a special team do a forensic review for purpose of transfer pricing and tax avoidance.

Say Shell has an own oil field in Nigeria with a marginal production cost of $30. Nigeria would be quite interested in what price Shell Nigeria sells it to what is probably a buying office in some tax haven (that obviously never receives physical goods)

Depending on tax rates, Shell Tax Haven would probably sell that into SA at the general market price not Shell’s true cost.

That comment is many things. If even partially true it is the best argument I have seen in a long time for the deregulation of the petrol price. It works well in just about every country in the world worth anything.

Great idea.

With deregulation comes forecourt self service……………. how may pump attendants lose their jobs?

That friendly neighbourhood SS then becomes an even bigger target for violent crime and heists.

Or maybe we just select our own personal form of deregulation.

BTW: be careful what you wish for. Maybe the price goes up? Maybe there is not enough investment in the oil industry because margins are too low? Maybe we cannot get new technology cars because our refineries cannot afford to upgrade?

Who knows?

Not true. Check your facts. Sasol makes petrol from coal, gas and shipped in crude.

Like the oil industry, or not – the minister is bound by the LAW, as the article correctly points out!

Yep, and look how cheap Sasol fuel is. The same sasol build with our tax monies and supplying about 45% of SA fuel from SA coal. Oh, and by the way, we don’t mention the massive amounts of ethanol they add to SA petrol. Really cheap SA fuel we get here, no thanks to corporate greed sasol.

Do you think it would be better if we had a floating fuel price, where we pay less than the rest of the world when the oil price is higher than Sasols breakeven (like now) and more when the oil price drops below Sasols breakeven? Cannot remember what Sasols breakeven is

Given that Ramaphosa & most of his NEC were all complicit in the State capture & looting of the Zuma years why do we expect any improvement? Not to mention gangsters like Ace Magashule forming the bedrock (aka quicksand) of the proven corrupt ANC.

The ANC is an organisation rotten to te core, with no morals or values, riding on Mandela’s (not so kosher) legacy. All that keeps them in power is the poor, uneducated masses, who this organisation keeps oppressing to keep their votes. They have ruined this country and its economy. “The ANC government set out to destroy apartheid & transform South Africa. But they have destroyed South Africa and transformed apartheid”

This is the same minister that refused to approve new power stations when he was minister of energy, which lead to, shortage in electrical generation capacity and the load shedding.
Not withstanding the fact that the GDP was growing at a reasonable rate and the government new that the extra capacity would be required.

Not the same man, same ministry obviously but Jeff wasn’t the one holding back power stations.

Power station debale was probably started by that epitome of a champagne socialist Jay Naidoo who still has the cheek to pontificate about how hard done by the poor and workers of SA are.

Slightly off this specific article but nonetheless connected is the amazing comment made by Goldman Sacks a few days ago “Rand undervalued, could hit R11/$, says Goldman Sachs exec”

What??

Apart from the very high probability that they are trying to influence the market, how can that be a sane expectation?

Merely the standard economist’s gambit: Get a way-out prediction right, and you’ll be famous forever; get it wrong, and no-one will notice.

Isn’t it interesting that SA has yet to adopt the concept of .electric vehicles when the rest of the world is making it policy for all vehicles to be electric in the near future? Who is protecting who here at the expense of a healthy people, country and planet? Just a thought!

Electric vehicles have no place in South Africa for at least two decades, if not more as it would mean the destruction of the motor industry as we know it. Why?

1. Compared to their internal combustion counterparts require virtually no servicing bar mechanical brakes, and then infrequently due to regeneration braking and the ubiquitous pollen filter. Guess what will happen to all those employed in the motor industry? All but a few highly qualified techies will get to keep their jobs.

2. Electric motors, in particular brush-less AC / DC electric motors are capable of very high mileage and don’t the wear of the IC engines, ergo, much more reliable and capable of achieving truly high mileages withou any drama – Oops there goes the maintenance plan.

3. The average electric car owner would not make a trip to the filing station but rather charge at home.

4. electric cars require a different skills set to maintain them – service workshops would lose at 80% of current staffing, if not more. We all know where the unemployment figure will go to, don’t we? By the way, the wholesale adoption of electric vehicles worldwide has not been thought through all that well – unemployment in the motor industry worldwide will go through the roof.

5. Electric cars only sell in the USA due to the very generous tax allowances granted not only by the Federal Government but also State subsidies. When the state of Georgia ended its $6500 subsidy, the sale of Nissan Leafs plummeted down to almost nothing. Expect “The Donald” to end the Federal subsidy as well; the man is positively anti Green, and when this happens electric vehicles become less attractive.

So (some) automakers will persevere with the infernal combustion engine, most like with on board hydrogen generation, which will reduce emissions down to half if not more of the present standards.

Already in the USA some major companies are involved in plasma technology to improve combustion and take it to 50% efficiency. Diesel / Electric hybrids where the diesel motor runs at a constant speed, most efficient emissions wise, could take real world fuel economy down to 2 L/100kms.

Anyway, how would the Government recoup the revenue from the fuel levy? So there the infernal combustion engine is not dead but getting a reprieve.

You mean the same Goldman Sacks who were directly responsible for the Crash of 2008? That one.???
Enough said.

GS was not responsible for the crash of 2008. Homeowners borrowing money they could never repay and banks granting credit that was unlikely to get repaid was at the root of the crisis, like it is at the root of all financial crises, since Roman times. Did derivatives play a role, yes, it made lending easier but it was not the main driver – pricing of loans that did not reflect credit risk was the main problem .

…..petrol price increases are a symptom of a weak economy.

I’ll play devils advocate here and say, just keep in mind that the price of oil did almost literally double in the past year.

And the ZAR losing 30% of its value to the USD this year didn’t help either, in fact petrol still has a long way up to go sadly.

I am missing something in your argument. Petrol price = oil price. Oil price = demand/supply. How does weak SA economy influence global oil supply/demand fundamentals.

You can read the article on the AA website

“It is important to understand that rising fuel prices are not a petrol issue. They are an economic issue. What we all need to get behind, as a nation, is understanding how the government is spending the money from the levies on fuel, and how any wastage in expenditure can be curbed. In this way, the considerable onus on consumers will, in the long run, be eased.”

https://www.aa.co.za/insights/fuel-price-deregulation-complex

Increases are results of exchange rate fluctuations and crude oil prices. Then admin costs like levies, etc

ANC and ZA public just do not get it. The rule of law should not allow for ministerial discretion. Similar problem in the mining industry where the minister can decide winners and losers. Same thing in Home Affairs.
The intervention of P Gordhan in the Eskom salary negotiations is another example – political considerations take precedent to the detriment of the long term future.
The worst that can happen is what we saw in the Zuma years is where ministers pervert the entire governing process for personal gain. There is nothing to stop this from happening again.

The only discretion a politician should have is regarding levies on fuel – like scrapping the fuel levy in this case.

Keeping ‘RETAIL PRICE MAINTENANCE’ as a policy is part of the politicisation of the fuel price.

The obvious goal is keeping jobs, that are built into the general fuel price.

Sop true, but we need the jobs …

The only thing that hasn’t been politicised is the colour of motor vehicles and if you ask me there seems to be way too many ‘white-coloured vehicles on our roads!!!Time for car colours to transform and resemble the demographic of South Africa.

All ANC cadre cars should be red because they are a bunch of commies.

And if so they must all be Alfa Romeos …

Agree, only the governing party will want party colours and spend all our taxes in a fight with the EFF because they’ll want only red cars on the road.

I can distinctly remember (was it somewhere in 2015?) the Brent Crude price dropped to around 40$pb (or even below that), and AT THE SAME time our thieving Govt thought it well to give a hefty annual increase to the Fuel Levy.

Govt’s thinking was: since intl oil prices were historically low below 40$pb, the local pump price would be left more or less where it was, without dropping much…as the public wouldn’t complain (so long the pump price doesn’t increase…)…and govt can collect more fuel tax.

And I thought by myself: …yes, with that hefty Fuel Levy/RAF increase in 2015…while oil was cheap (to counter balance pump price)…will be BITING US IN THE BACKSIDE…once intl oil prices shoot up again in later years.

….and that’s where we are TODAY folks! 🙁

The real problem is the fuel levy i.e. direct taxes and RAF funding (now insolvent) – another stranglehold by the kleptocracy of the ANC-ganster cadres

If they hadn’t sold the oil stockpile at a loss we could have had a buffer against high oil prices.

Apparently they sold the country’s Oil @ $22 barrel.

Superb good market timing. That was in the Zuma era … good leadership.

Cooking oil is now cheaper than diesel. Old tech diesel engines can run on a straight blend of veg oil and diesel.

Excellent article. Let’s face it, what has Radebe EVER done that can be seen as positive for SA? As the longest serving cabinet minister and years at Justice, we’re worse off for him. It’s the finance or energy minster that must scrap the fuel levy if it’s really about relief to the poor. And agricultural economists have been loud since yesterday about what this latest increase is doing to the farming sector. Wait till other sectors do their maths.

End of comments.

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