The government has set the ball rolling to free up SA’s highly regulated fuel price and introduce a system that will for the first time see retailers competing on price and offering motorists discounts and special offers to fill up at their stations.
For the first time in SA’s history, the price of fuel will not be determined by the government, after it takes the first step in this direction in June. The change has been welcomed by the industry and economists.
It is designed to give motorists a reprieve from rising fuel prices, which this week hit record highs. The Russia-Ukraine war and the prospect of steeply rising prices have sped up the surprise move to deregulate, which had previously been resisted.
Finance minister Enoch Godongwana this week cut the fuel levy by more than 40% from next week until the end of May as part of a R6bn package to ease the burden on motorists. He said in an interview with the Sunday Times on Saturday that this was the first step to a freer market in fuel, and lower prices.
Efficient Group chief economist Dawie Roodt said deregulation would put smiles on consumers’ faces, but this would depend on where they live. Those near urban centres — where there is more competition among retailers — will have more to be happy about.
Godongwana told the Sunday Times on Saturday that full deregulation will not happen until the National Treasury figures out how to recoup the hit the fiscus would take if taxes on the fuel price were removed in one go.
“We are taking the fuel levy completely out but it cannot be done in one financial year, that would throw the fiscal framework off by R90bn,” he said.
He said there are various options already on the table, including additional taxes on motor licence renewal fees to fund the Road Accident Fund, whose primary source of revenue is a levy raised on fuel. Once the government has figured out a way of removing taxes and other administered prices from the fuel price, that will make it attractive for competition and drastically lower the price consumers pay to fill up.
Wayne Duvenage, CEO of the civic group Outa, welcomed the government’s move and called for it to fully deregulate prices. “That is a good thing. The diesel price has been deregulated and I think the same thing is happening with petrol.”
Duvenage said the high fuel prices prompted authorities to reconsider SA’s fuel price structure.
“I think for far too long there have been a lot of levies that crept into the various margins for wholesalers and retailers. These high prices have made the government relook at the fuel price structure. I think that is a good thing,” he said.
We are taking the fuel levy completely out but it cannot be done in one financial year, that would throw the fiscal framework off by R90bn
— Finance minister Enoch Godongwana
He said fuel stations would be able to “publish their prices visibly at their pumps, especially where there is traffic going past. They will set their petrol prices at night and day. It will be interesting how it plays out.” Duvenage said retailers such as Pick n Pay might also step into the fuel market.
“I think we are heading there,” he said.
However, Duvenage said petrol will not necessarily be cheap if the price is deregulated.
“It is not going to be cheap because of the margins. There is not much for retailers to play with. Some retailers might discount it but what you don’t want is manipulation by a few of the bigger players who push prices too high. However, the deregulation will create a little bit of competition,” he said.
In a joint media release the finance minister and department of mineral resources & energy (DMRE) this week announced a two-phase approach that will see motorists enjoy a two-month cushion at the pumps as rising food and energy costs also weigh heavy on their pockets.
Phase 1 includes a temporary cut to the general fuel levy of R1.50 a litre, from April 6 to May 31, reducing the levy for petrol from R3.85 a litre to R2.35 a litre.
The levy on diesel will be reduced from R3.70 a litre to R2.20 a litre. The reduction in the fuel levy will cost about R6bn in foregone tax revenue for the two-month period.
The statement said revenue foregone by the reduction in levies would be recouped through the sale of strategic crude oil reserves, held by the Central Energy Fund subsidiary the Strategic Fuel Fund (SFF). The sale will cover the R6bn shortfall.
Phase 2 includes a reduction in the basic fuel price of 3c per litre, in line with the recommendations of the review done by the DMRE. A price cap on 93 octane petrol has been introduced following the previous DMRE proposal and consultation.
“This means that retailers can sell [93 octane] below the regulated prices,” said the minister. However, Duvenage said of this move: “How many cars are still running with 93 octane?”
Godongwana said the sale of crude oil reserves will be handled by the DMRE.
“I acted on the basis of their promise that they will sell certain barrels of crude oil to compensate for whatever I would have lost in revenue,” he said.
Roodt said full deregulation will have a number of consequences.
“In urban areas, where there is more competition, we probably going to see that the petrol price will be lower than in the rural areas where there is less competition,” he said.
“I would think that, for example, shopping centres will open filling stations and sell petrol there as a loss leader. They can give you a voucher to go and fill up when you buy from them. Big retailers will use this opportunity.”
Roodt said the finance minister's announcement on Thursday amounted to partial deregulation.
“If you fully deregulate, people charge more or less. The way I understand it is that there will be a maximum price that you can charge for petrol. You are not allowed to sell it for more than the maximum price but you can sell it for less. So, retailers can decide to take the maximum profit or take less. I think it is a step in the right direction but it is not enough. If you want to deregulate, do it properly.”
If you fully deregulate, people charge more or less. The way I understand it is that there will be a maximum price that you can charge for petrol
— Efficient Group chief economist Dawie Roodt
He said the fuel industry is very lucrative, hence the need to fully deregulate prices.
“And that is why I say you can’t have your cake and eat it. You have to decide if you want to deregulate or you don’t. You have to allow competition at all levels — at the wholesale margin, at the retail margin and on transport.”
Hamlet Morule, spokesperson for petroleum giant BP, said the company welcomed the joint statement by the minister and the DMRE.
“It mitigates against the impact of the fuel price increases and serves as a much-needed short-term relief for the consumers,” said Morule.
The South African Petroleum Industry Association (Sapia), which represents local fuel retailers, said on Friday it will engage with the DMRE on its proposed package of additional measures to be introduced after the expiry of the temporary measures.
“Sapia supports a fair and transparent regulatory pricing system with periodic reviews but with stronger oversight of regulations. This is necessary to ensure that pricing mechanisms keep abreast of developments and that unacceptable practices are not allowed to proliferate in the industry,” it said.
Commenting on the measures, Isaah Mhlanga, chief economist at Alexforbes, said they would provide relief over the short term for motorists.
“I think the review, which they are doing to provide a more sustainable and competitive pricing model of fuel, will likely remove some of the taxes, which is going to help,” he said.
Miyelani Mkhabela, CEO and chief economist at Antswisa Transaction Advisory, said the general fuel levy reduction will be a relief to individual and business consumers. “We expect to see stability in food and transport prices nationwide. The supply chain bottlenecks will be stabilised from the third quarter of 2022 as the confrontational risk and Covid-19 is proactively managed”.
Agri SA also welcomed the announcement of the temporary reduction of the general fuel levy as a necessary intervention to buttress the agricultural sector and consumers against the impact of rising fuel prices on the cost of food.
The chair of parliament's portfolio committee for mineral resource & energy, Sahlulele Luzipo, sounded a note of caution on the sale of the strategic oil reserves.
“The government will need to give clear commitments that the project is done above board,” he said referring to a previous sale of crude oil reserves by the SFF that was the subject of a criminal investigation by the Hawks.
Glen TylerDavies, the South African team leader of the NGO 350Africa.org, urged the government to fast-track the development of renewable energy.
“The government’s efforts to ease the burden of record-high fuel prices on South African citizens are welcome,” he said. “These high prices demonstrate the volatility of fossil fuel prices and should serve as yet another reason that the South African government should be pursuing renewable energy like solar and wind power relentlessly.”
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