Get pumped for hard times

2014-03-23 14:00

Cost of petrol could reach close to R20 a litre on rand depreciation and an oil price spike

The weak rand, high average international prices for fuel and rising oil refinery prices have pushed the price of petrol to its highest level in seven years.

The new general fuel levy will heap more pressure on cash-strapped motorists – and Gauteng’s e-tolling system is expected to add to the strain.

The 12c increase in the levy – announced by Finance Minister Pravin Gordhan in last month’s budget speech – kicks in next month.

The biggest culprit in rising petrol prices is the weak rand, which took a beating against the US dollar late in January and early last month, prompting SA Reserve Bank Governor Gill Marcus to raise the repo rate at which banks lend money to each other by 50 basis points in a partial attempt to arrest the decline.

Economists expect the rand to strengthen in the coming months as volatile emerging market currencies (including the rand) settle when an expected recovery in the global economy boosts investor confidence. This will give motorists some breathing space.

But this could be short-lived as the SA Petroleum Industry Association (Sapia) – which represents the collective interests of oil giants including BP, Sasol, Shell, Chevron and Engen – might add on to the cost later this year as e-tolls cut into its members’ bottom line.

According to Sapia’s executive director, Avhapfani Tshifularo, e-tolls were not included in fuel transport costs, a component of the total retail price of petrol.

He said: “The petrol retail price is regulated by the minister of energy. The department of energy is in the process of reviewing fuel primary transport costs, also called magisterial district zone differentials, and e-tolls will have to form part of this review as it is a real cost to industry.”

At the moment, the industry is bearing the extra cost of transporting fuel to and within Gauteng while government completes its study, which could take six months, according to Tshifularo.

“We have got no choice as the system currently does not allow the recovery of tolling fees.”

In the worst case scenario, the cost of petrol could reach close to R20 a litre “in the event of a significant rand depreciation and oil price spike”, according to FNB analyst Alex Smith.

“But even that scenario is extreme and not in line with our view. We actually expect the rand to strengthen as the year progresses, in which case the petrol price could be expected to stabilise and perhaps even drop a little from current levels,” he said.

Automobile Association data show the retail price of petrol in Gauteng is now between R13.91 and R14.32 for all grades of the fuel, its highest level in seven years and a far cry from the R5.82 to R6.01 range observed in January 2009.

This means motorists driving a Volkswagen Polo 1.2?TDi BlueMotion model, which premiered in 2007 and is widely regarded as the most fuel-efficient car on the road with a reported fuel economy of 3.4?litres/100km, now have to cough up R47.97/100km – compared with just R19.79/100km in January 2009.

Each increase in the petrol price initially pushes up the cost of other goods as it has a direct effect on transport costs, an important input in the production and distribution of goods.

Smith said: “As most consumers have a limited amount of money to spend each month and transport makes up a significant portion of their spending, higher transport costs typically mean consumers can spend less on other goods.

“Initially, goods prices tend to go up due to higher input costs, but subsequently, goods prices can sometimes go down or grow at a slower rate due to a lack of demand.”

Absa Capital’s emerging markets team recently quantified the effect of the petrol hike on consumer price inflation, saying it added 0.2 percentage points to the basket; while Nedbank said petrol accounted for 5.7% of the basket.

New vehicle sales will also be affected, according to Wessel Steffens, the head of Absa’s vehicle and commercial asset finance division.

“With the current high fuel prices, vehicle fuel efficiency will be an important focus area for consumers, impacting buying patterns,” he wrote in a report on new vehicle sales, which was released two weeks ago.

Nedbank economist Matimba Khosa said the Reserve Bank’s latest Quarterly Bulletin showed consumer spending on transport and communication goods has been moderating gradually over the past five years, amounting to just 1.7% last year, down from 10.7% in 2008, 5.3% in 2011 and 3.9% in 2012.

“Households are facing financial challenges and the persistent increase in the price of petrol will inflict further hardship,” said Khosa.

Government is the biggest winner when it comes to fuel prices. The largest domestic contributors to the retail fuel price are government levies – at a combined cost of R3.13 a litre.

A big chunk of this amount goes to the general fuel levy (at nearly R2.13 a litre), and will inject close to R2.3?billion into government coffers when the 12c increase kicks in.

But Khosa believes government is trying to reduce fuel transport costs through projects like the oil pipeline from Durban to Joburg.

“This should to a certain extent help reduce the transportation cost of petroleum products, which may result in a reduction in some levies that are included in the petrol price,” he said.

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