Oil price crash is good news for Eskom, may also drop fuel prices

2020-03-10 10:15
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The plunge in international oil prices is good news for Eskom and may also give motorists extra relief.

Eskom can’t generate enough power from its coal-fired power stations to meet demand, and burnt through diesel worth R6,5 billion at its open-cycle gas turbines in its last financial year to try and avert or limit power cuts.

With the utility expecting supply constraints to persist for at least 18 months, a prolonged fuel price slump will go some way to helping contain its primary energy costs.

The price of oil plummeted as much as 32% in rand terms on Monday, and was 23% lower in the early afternoon in Johannesburg, after talks between the Organisation of Petroleum Exporting Countries and Russia collapsed and Saudi Arabia initiated a price war.

The price of crude in rand terms — which determines South Africa’s petrol prices, which are regulated by the state — has plunged 19% in the past two trading sessions.

South Africa imports the vast majority of its fuel, and is therefore completely dependent on the oil price. In January alone, South Africa imported more than R16 billion in oil — almost 16% of total imports.

Every month, the Department of Energy fixes the petrol price based on the price of Brent crude oil and the rand/dollar exchange rate.

On Friday — before the oil crash — local fuel prices already looked set for large cuts in the first week of April. The Central Energy Fund calculated prospects of a price cut for 95 petrol of around 64c a litre, while 93 was on track for a 64c fall and diesel prices by around 78c.

However, while the oil crash will probably mean lower fuel prices next month, the full effect will be muted by a couple of factors.

Firstly, the rand has also weakened amid the global market turmoil. The other factor is the full brunt of new fuel taxes, which will come into effect at the start of April, when the fuel levy increases by 16c and the levy for the Road Accident Fund by 9c.

This means that the oil price impact will have to be at least bigger than 25c a litre for it to start making a difference in the price at the pump.

In total, South Africans will, from April, pay R5,88 in tax on each litre of fuel.

For the petrol price to see a massive cut next month, the oil price will have to remain at these levels, and the rand must also remain relatively stable.

Read more on:    pietermaritzburg  |  stock market

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