Fuel: how much more?

2008-04-12 00:00

Economists explain

Economists say the effects of last week’s fuel price increase — R1,28 per litre for diesel and 68 c for petrol — are yet to be felt.

Given that the diesel price alone has risen by 59% in a year (from R5,90 in April 2007 to R9,38), there is a limit to what consumers and businesses can absorb, they warn.

Luke Doig, senior economist at Credit Guarantee, said fuel increases are now a bigger worry than electricity shortfalls.

Who is hardest hit?

According to Doig, fuel prices have a knock-on effect for almost all goods and services, starting with the producer and ending at the door of the consumer.

According to Nedbank economist Carmen Altenkirch, the sectors worst affected are agriculture (most farm equipment runs on diesel) and transport.

"The taxi industry raised fares by around R1 last month on a journey that cost between R8 and R10, which is roughly a 10 to 12,5% increase … last month’s increase would have added R40 to the average person’s travel expenditure, quite a significant increase for a low income household."

The SA Bus Operators’ Association warned that this latest increase in the price of diesel will add up to four percent to operating expenses, forcing the industry to consider another increase.

Business passes the buck

Many argue that consumers rather than businesses have taken the fall.

Until now, increases in the prices of other inputs made it difficult for consumers to work out the true effect fuel has on overall price hikes, but the two latest back-to-back increases make it difficult for commercial users to disguise passing on fuel price hikes.

But Professor Marcel Kohler, senior lecturer in economics at the University of KwaZulu-Natal, argued: "Producers are just trying to make ends meet. This is not about making profits. Their only option is to pass on the increase."

Altenkirch added that, although it seems hard to believe, retailers have even cushioned consumers. Weaker consumer demand has limited the extent to which they can inflate prices. Retail food prices have not risen as fast as those at manufacturing and agricultural levels. But retailers’ profit margins have been squeezed to the limit and they will now have to pass on higher increases.

Consumer backlash

How much more can consumers take? Because of high interest rates, inflation and the threat of massive increases in municipal rates and electricity costs, some backlash is inevitable, economists say.

Kohler said consumers have little choice but to absorb additional costs on essentials like food. However, they will adjust their spending and become selective of non-essentials.

"We will see changes in spending patterns and producers will suffer," he said.

The outcome will be more business failures. Doig said these hit an all time high in February and are likely to increase by at least 20% from now onwards.

Economists have also warned of more job losses and a growing number of repossessions.

Kohler believes South Africans will simply have to adjust. We have always paid very little for energy-intensive commodities because oil and electricity were subsidised by government during the apartheid era, meaning that many enjoyed luxuries we will now have to do without.

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