Understanding the fuel price - real heroes and villains exposed

ABSTRACT: The calculation of the petrol price is frequently misunderstood and misrepresented. Understanding the pricing mechanism exposes the true heroes and villains of increases, and provides insight into probable future movements.

In January 2009, the inland (Reef) pump price for unleaded 95 octane petrol (ULP 95) was 601 cents per litre. By October, the price was 765 cpl – a difference of R1.64. How did the increase come about?

Two factors

Dave Wright, GM of Corporate Planning, Engen Petroleum, says the price of petrol is made up of two parts - the so-called 'Basic Fuel Price' (BFP) and 'government-controlled' portions.

The government-controlled portion comprises a range of petrol levies, taxes and prescribed margins applied to petrol as it moves through the supply chain to the consumer.

The BFP, in contrast, is determined by international 'product' (petrol) prices. In other words, South Africa's BFP is simply the conversion into rands of the dollar-denominated international BFP of the time (determined monthly in arrears).

Breakdown

The Department of Energy supplies the following breakdown of the petrol price's movement from January to October this year. The first column represents the BFP, while the others make up the government-controlled portion. While the BFP increased by 110.5cpl, the government portion rose by 53.5cpl.

Petrol levies, taxes and margins 95 Octane (Unleaded PETROL)
2009 (RSA c/litre)	BFP	Fuel tax	Customs & excise	Equalisation fund levy	Road accident fund	Transport cost	Pipeline Levy	Wholesale margin	Retail margin	Slate levy	Delivery cost	DSML	Incremental Inland Transport Recovery Cost
Jan	274.763	127.000	4.000	0.00	46.500	15.400	0.150	44.887	67.300	0.00	9.50	10.00	1.50
Oct	385.263	150.000	4.000	0.00	64.000	14.00	0.150	51.087	72.700	0.00	10.80	10.00	3.00
Increase	110.50	23	0	0	17.5	-1.4	0	6.2	5.4	0	1.3	0	1.5

1. A month-by-month breakdown is available at http://www.dme.gov.za/energy/October/price elements petrol October 2009.htm.
2. The recipients of the various charges are as follows:
   • Fuel tax, Customs and excise duties, Equalisation Fund and Road Accident Fund – government;
   • Slate levy (a fund created to compensate fuel retailers for 'under-recovery' of the fuel price in cases where the international BFP continues to rise after the petrol price has been fixed for the month, or alternatively to compensate the state for oil companies' over-recovery, in cases were the BFP falls) – government
   • DSML (a demand-side management levy to curb high-octane demand) - government
   • Transport cost and Pipeline levy – Transnet Pipelines
   • Wholesale margin, delivery cost (from depots to retail sites) and Incremental Inland Transport Recovery Cost – marketers like Engen
   • Retail margin – dealers

Crude correlation

Wright says while many factors can influence the government portion of the petrol price, the BFP relies on three main factors – the crude oil price, global market conditions and the rand-dollar exchange rate.

"International product prices show a strong long-term correlation with the price of crude oil," he says.

As for global markets, he explains, the world is continuing its battle to emerge from the global recession, with oil-producing countries managing demand carefully so as not to spoil a long-term recovery through unsustainable short-term pricing. While international prices are rising, oil producers may dampen demand by introducing more oil into markets.

Lastly, he says, the strong rand has benefited consumers. "Had it stayed at R9.90 to the dollar, where it was in January, the BFP and pump price would have been R1.83 more than it is now. Instead, the rand firmed, keeping the petrol price almost R2 lower to the litre."

Future outlook

So what will the oil price, international demand and the rand-dollar exchange rate do in the foreseeable future? Wright says the consensus is that oil must remain in the $60-70 per barrel range to fuel a sustainable economic recovery. The expectation for the rand, on the other hand is to continue weakening against the dollar.

This would see local petrol prices continue to rise throughout next year, though not to the levels experienced during 2008 before the slump. As for the immediate future, the international BFP has already gained 7cpl in the past month, but the stronger rand will reduce this potential increase by 6cpl. As a result, Wright says, an increase of 1cpl for November may be implemented.

It is also possible that the price will not be changed in November and that the December price change will instead accommodate it, together with whatever changes in international prices and the exchange rate happen during November.

For further information, please contact Tania Landsberg Engen Group Communications Manager on 021 403 4911, or e-mail her at tania.landsberg@engenoil.com.