Fuel price bonanza

2014-12-21 15:00

As the price of oil continues to slide, next year’s petrol price drop will offer only slight relief to South Africans hard-hit by higher living costs

There will be one bit of good news for South Africans at the start of next year.

The oil price slump should see the petrol price drop by more than R1 when the change is announced early next month – and more reductions can be expected if the oil price slide continues.

On December 3, the inland price of petrol dropped from R13.16 a litre to R12.47 and the Automobile Association is predicting a further drop of about R1 to R11.47 a litre early next month.

Before this, the price of petrol has been going up steadily. It went from just more than R10 in January 2012 to a high of R14.39 in April this year. Since August – when petrol was still at more than R14 a litre – the price has dropped sharply as the oil price slumped to the current level of about $60 (R695) a barrel.

The price of oil has dropped by 46% since June. Petrol has fallen 13% since August and is now at a 19-month low.

But market watchers are keeping an eye on the weakening rand, which is a factor in the petrol price, as fuel is bought in dollars.

It could drop further, depending on output from US shale oil producers and if oil cartel Opec decides to curb production at its next meeting in June.

And while the petrol price decline is cause for celebration, South Africans are still spending relatively more on petrol than many other countries.

According to Forbes, South Africans spend the most money on petrol relative to their earnings. We spend more than 5% of annual income on petrol, even though it costs the equivalent of $4.65 a gallon.

Even though Norwegians have the highest petrol price in the world, at $9.26 a gallon, petrol is not expensive relative to their high income levels.

“In fact, filling up only accounts for 0.66% of an annual Norwegian income each year,” said Forbes, quoting Bloomberg data.

After South Africa, Cyprus and Mexico rank second and third with 3.6% and 3.4%, respectively.

An Old Mutual investment note explained that food and energy prices have been the main reason behind lower inflation – which slowed to 5.8% year on year in November. Food and nonalcoholic beverage inflation dropped from 7.8% to 7.6%.

Petrol inflation was just 1.1%, down from 2.4%, and was expected to decelerate in December and January. Old Mutual says that based on the current average over-recovery of around R1 a litre, “it could be as much as -15%”, meaning fuel prices could decline by that amount.

Theoretically, the prices of most goods and services should come down with a lower petrol price as transport costs are worked into the price of goods. This has happened, but only marginally.

Moshabele Modise, an investment analyst at Citadel Investment Services, told Bloomberg that costs might drop another 8% next month as the lower oil price outweighs the effect of the weaker currency. Transport costs contribute 16% to inflation.

As South Africans are dealing with huge increases in costs, from electricity to education, it is unlikely the lower petrol price is going to significantly change the standard of living.

However, it will mean that trips over the holiday season will cost much less than they did at any other time this year.

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