Diesel fuel pricing mechanism is finally earmarked for an overhaul

“Daar’s niks diesel in die Overberg nie (There’s no diesel in the Overberg),” was the diagnosis delivered by a Caledon resident who had to drive to Hermanus to discover the extent of the fuel crisis. When news of possible supply constraints reached the Western Cape’s bread basket, wheat farmers prepping for planting season made haste to the nearest filling stations.

The government was quick to reassure ­citizens that there were no fuel shortages, but it is difficult to preach calm to an industry that has been bleeding from multiple mortal wounds. Is it still panic buying when livelihoods are at stake?

OVK, a cornerstone supplier in South Africa’s expansive agricultural belt (operating across the Free State, Eastern Cape and Northern Cape, all the way to North West), responded quickly by suspending all diesel orders on 9 March.

A week later came the notice: “Due to external factors that have led to an increase in the demand for fuel, OVK is unable to obtain sufficient fuel to serve our customers and community in the normal course of business. OVK has absorbed a substantial portion of the price increases which have occurred to date, but due to further fuel price increases, it is no longer possible to subsidise the increased price.

“OVK is therefore compelled to implement a price increase on diesel effective from midnight, 17 March 2026.”

Unlike its highly regulated petroleum cousin, diesel operates according to more liberal pricing economics. It’s also the same flavour of dinosaur juice that is preferred by the machines of war, and the vehicles of the global supply chain that now need to find alternative routes around conflict-constricted chokepoints.

Live by the free market

Deregulating the price of diesel was first proposed in a 1998 white paper. The then Department of Minerals and Energy’s expansive White Paper on the Energy Policy of the Republic of South Africa envisioned a utopia where competitive market forces, rather than state control, determined prices. The idea was that unrestricted market entry and competition would naturally keep prices low and product plentiful.

Instead, the framework created a Jekyll and Hyde scenario governed by the Petro­leum Products Act of 1977. Whereas petrol is strictly price-regulated at the pump via the Regulatory Accounting System, diesel’s retail price is treated as the Wild West.

To understand the chaos at the pumps, one has to look at the basic fuel price. South Africa uses an import parity pricing model that accounts for the theoretical cost of importing a refined litre of fuel from an international refinery to a South African port.

About 89% of this cost is tied to the “free on board” international spot price (currently heavily skewed by Brent crude’s price surge), 9% is maritime freight and 2% covers insurance and other logistics costs.

Then comes the Treasury’s cut. The general fuel levy, Road Accident Fund and carbon fuel levy (which ticked up to 23c/litre in April) historically slap upwards of R6.35 on every litre. Primary sectors such as agriculture and mining can claim rebates, but the upfront cash flow hit is still brutal.

Because retail diesel is deregulated, the government only publishes a wholesale reference price – usually before the first Wednesday of the month. Individual retailers are free to make their own margins. So when global shocks happen, opportunistic retailers pre-emptively hike prices almost immediately, and in the middle of the month.

What has now been characterised as “unethical price gouging” is perfectly legal under the deregulated framework.

Indecent exposure

South Africa is exposed because of severe deindustrialisation. It lost about 50% of its domestic crude refining capacity with the closures of Sapref, Enref and PetroSA.

Sasol’s Secunda coal-to-liquids plant provides a ­crucial domestic buffer of 150,000 barrels a day, but South Africa is structurally reliant on imported, fully refined diesel.

About 80% of these imports flowed from the Middle East through the Strait of Hormuz, but have now been diversified to Africa and India.

But this doesn’t limber up the intensely inelastic demand problem. Diesel makes up more than 50% of the liquid fuels market. The collapse of Transnet means the bulk of South Africa’s commodities (including 81% of maize and 76% of wheat) rides on diesel-guzzling trucks. And on the planting and harvesting side of the food equation, one combine harvester can burn 600 litres in a 10-hour shift.

Acknowledging that unbridled diesel costs would decimate food security and trigger runaway inflation, the government recently instituted an emergency, temporary R3 per litre reduction of the general fuel levy.

But sticking on plasters doesn’t fix structural fractures. The Department of Mineral and Petroleum Resources has initiated a ­formal root-and-branch review of the fuel pricing mechanism.

“Our pricing formula is based on two components,” explained Robert Maake, director of the fuel pricing mechanism. “One is the import part where all the costs associated with importing petroleum products into South Africa are accounted for.

“The second part is the local factor... What is happening now is the very high oil price due to the war in the Middle East, which is driving the fuel prices, and the weaker rand.”

The proposed overhaul won’t just tweak the edges; it aims to rewrite the economics of the supply chain to protect consumers and key industries from run­away margins.

“What we are going to be doing now is to review how the industry margins are calculated in South Africa – the wholesale margins, retail margins, secondary storage and secondary distribution,” Maake said, but he admitted that the long-term intervention strategy was still taking shape.

“The process has started. We have already signed a service-level agreement with a service provider, and we expect that work to be concluded by March 2027.”

Until the overhaul is complete, the industry will have to navigate a volatile free market. Citizens will have to be thankful for the temporary tax reprieve, but acutely aware that every geopolitical tremor threatens to drain the tanks of the Overberg. DM

This story first appeared in our weekly DM168 newspaper, available countrywide for R35.