Why our fuel price is constantly fluctuating

ANC worried about fuel increases.
ANC worried about fuel increases.
Image: 123RF/Vojtech Vlk

Like a yo-yo, fuel prices keep going up and down. What causes the rise and fall of petrol and diesel?

Why is there this constant fluctuation in fuel prices which gives consumers a headache as they battle to stay abreast of their financial expenses?

In June 2019, unleaded 93 octane petrol cost R16.57 a litre. Then in July, the price decreased to R15.61. In August, the petrol price went up to R15.72. In September, it went up to R15.83. In October, it dropped to R15.79. On November 6, it dropped again to R 15.66.

Oil volatility is likely to continue for a long time, and many competing factors are in play, including the country's difficult economic position and the vagaries of the international oil price.

The petrol retail price is regulated by government, and changed every month on the first Wednesday of the month.

The calculation of the new price is done by the Central Energy Fund (CEF) on behalf of the department of energy (DOE). The petrol pump price is composed of a number of price elements and these can be divided into international and domestic elements.

The international element, or Basic Fuel Price (BFP), is based on what it would cost a South African importer to buy petrol from an international refinery and to transport the product onto South African shores.

The diesel retail price is not regulated. The retail margin is estimated to be similar to regulated retail margin on petrol.

There are many local and international factors affecting this evaluation.

Local factors include the exchange rate of the rand against the US dollar, taxes, the recent implementation of the Road Accident Fund (RAF) levy, the fuel levy and customs, which account for 36% of fuel costs.

The pricing of oil at an international level and shipping costs place considerable strain on South Africa's fuel import efforts. The external factors move constantly and account for most of the monthly movements in prices.

Both the world market price of oil and the exchange rate are outside the control of the industry.

The weakening of the rand affects oil prices because oil is traditionally traded in dollars. International oil prices may decrease in future, however, for as long as the rand/dollar exchange rate depreciates, it will still cost more to buy oil, thus causing the fuel prices to continue fluctuating rapidly.

The first quarter of 2019 saw South Africa's economy drop drastically by 3%. The main contributing factors were load shedding and a noticeable decrease of investment into the country.

Following the release of the GDP, the rand depreciated by almost 2% to R14.76 against the dollar, resulting in an increase in the fuel price index of 7.6% in April.

The petrol price subsequently increased from R14.60 in March to R15.94 in April.

Unfortunately, consumers are being placed under increasing pressure to keep up.

The fluctuating fuel costs will see many South Africans burning even larger holes in their pockets, with many spending considerable amounts of their income on fuel costs restricting their spending potential in other, sometimes necessary areas. This would negatively impact on South Africa's GDP.

The latest fuel price decrease on 6 November was due to a brief rand appreciation against the dollar in the past month.

There is a uni-directional negative relationship on economic growth and fuel levy. Any increase in fuel tax impacts the poor hardest, as they mostly rely on public transport.

*Muzuva is a senior finance and economics lecturer at private higher education institution Mancosa

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