SA motorists are top worldwide beneficiaries of oil price collapse

2015-01-06 13:59

The price of oil has collapsed an astonishing 50% in recent months and the collapse is showing no signs of slowing down. The main reasons for the collapse are sagging global demand due to a global economic slowdown, and a supply glut brought on by record production in major producers and the US shale revolution.

This is estimated to be the equivalent of a US$600Bn "quantitative Easing" for the US consumer, which would boost the US economy, but the chart below taken from data provided by Bloomberg, the Associates of International Research, Europe's energy portal and OECD shows that South African motorists spend the most of their annual incomes on petrol and are likely to gain the most savings worldwide from a consumer perspective:

The reason we spend so much on petrol is likely to do with our vast geographical distances, lack of reliable public transport, love of personal motoring as a status symbol and no doubt punitive fuel taxes and levies (SA petrol is way more expensive than the global average). With our annual spend of 5.17% of income on petrol, which is over THREE TIMES the global average annual spend of 1.64% of income, SA motorists will welcome the oil price collapse.

Just how much should we expect our petrol prices to drop by, assuming we remain at 50% reduction in crude prices? The price of crude oil makes up 50% of the retail price of petrol, with 25% being taxes and levies, 17% for logistics and cost of sales and 8% for refining and shipping.

Assuming petrol peaked at R14 per litre before the oil price collapse, we can expect that the crude component at this time of R7 has fallen to R3.5 which is the price decrease we should be expecting, taking the R14 per litre down to R10.50 per litre, a 25% reduction. Given that after the more recent reduction we are now paying R11.20 per litre, it seems we still have a 70c per litre (6%) reduction to go.

The benefits of a low oil prices don't just benefit motorists. The South African economy will be the third largest beneficiary from an economical perspective too, adding just over 1% to our gross domestic product if oil should settle at US$40. A sustained oil price of US$40 is probably the biggest single "quantitative easing" we are likely to witness in another decade and will be far more effective than any program the government can come up with. Sadly though, it is unlikely to have a large immediate effect  on job creation.

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