Business Maverick

Business Maverick

South Africa Weighs Fuel-Price Cap, Rationing, to Cut Costs

A worker fuels a vehicle on the forecourt of an MBT Petroleum (Pty) Ltd. gas station in Pretoria, South Africa, on Wednesday, Nov. 3, 2021. South Africa's gasoline prices rose to a record on Wednesday, adding to inflationary pressures in an economy that imports almost all of its fuel.

South Africa may introduce a gasoline-price cap and ration the amount of fuel sold to motorists to mitigate the impact of rising oil prices stemming from the war in Ukraine.

Adopting those measures would place South Africa on a growing list of nations that are trying to offset the impact of surging oil prices. Brazil has approved a bill to reduce fuel taxes on fuels; Japan will increase subsidy caps on gasoline and South Korea will extend its 20% domestic tax cuts by three months to the end of July, according to BloombergNEF.

“We are part of the global energy supply chain and therefore we are affected by this international conflict,” Department of Mineral Resources and Energy deputy Director-General Tseliso Maqubela told lawmakers in Cape Town on Tuesday. “Possible mitigation measures to counter the impact of rising fuel prices would be strict enforcement of speed limits, encouraging working from home again, limits on diesel quotas exported, and even the possibility of limiting the amount of fuel per motorist.”

South Africa doesn’t produce crude and has been increasing fuel imports as it closes domestic refineries that won’t be able to meet evolving low-carbon standards. The government regulates fuel prices, which include a tax used to finance a fund to compensate accident victims, along with other levies that make up about a third of what consumers pay.

The National Treasury in February kept all taxes on fuel unchanged for the first time since 1990.

“The South African government has become addicted to the current fuel pricing structure as it is the third-largest source of tax revenue and the easiest to collect,” Iraj Abedian, economist and founding member of Pan-African Investments said by phone from Cape Town.

The Treasury on Tuesday also said other interventions including a price cap previously mentioned by the DMRE should be considered. The government stepped in to shield motorists from a price surge in 2018. The slate levy account, which was used to mitigate the increase at the time, had a negative balance of 5.1 billion rand ($336 million) at the end of January, according to data from the Central Energy Fund.

Cost Shortfall

Data from the CEF show the retail price of gasoline could increase by more than 2 rand per liter next month and the wholesale cost of diesel by more than 3 rand, based on the average under-recovery on the fuels.

That would make transport and input costs for agriculture more expensive, push up food prices and add to consumer inflation.

“From fifteen years ago the structure of the energy pricing has changed rapidly and the formula should have been updated regularly,” said Abedian, who was a member of the Presidential Advisory Council during the early 2000s when National Treasury and the Department of Energy devised the current fuel formula. “What needs to be done is to ween government off its addiction and this cannot be done immediately.”

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