It’s time to change how South Africa’s petrol price is calculated

Providing cheaper fuels to South African citizens will not happen with the flick of switch but will require a multi-faceted, multi-departmental approach with the involvement of the private sector, says the Automobile Association (AA).

Presenting to parliament on Wednesday (14 April), the association said that long-term analysis of the components of the fuel price needs to be done as a matter of urgency,

This should include all calculations relating to the fuel price being audited to determine if they are still relevant and appropriate to South African conditions, said Willem Groenewald, chief executive of the AA.

Apart from focusing on the fuel price itself, Groenewald said extensive research must be conducted into every single element of the fuel value chain which contributes to the fuel price in South Africa.

Alternatives must be sought if any elements are deemed too expensive, and each cent which is being charged must be justified, he said.

Among the key recommendations made by the AA to the Portfolio Committee on measures to mitigate rising fuel costs were:

• An investigation of current pricing model;
• Recalculation and audit of existing elements within the pricing model;
• Reduction of the cost of the Road Accident Fund (RAF) to motorists through measures such as better management, improved road safety, and better policing;
• Better allocation and utilization of funds from the General Fuel Levy (GFL);
• Investment in alternatives to the country’s current reliance on fuel.

“Our aim is to fight for the rights of consumers and if that means we have to take a step back and relook how we’re doing things then that’s what needs to happen.

“Continuing with a pricing model because it’s historically the one we’ve always used doesn’t make sense; we must ask if there is a better model available and, if there is, we should consider replacing our existing one,” Groenewald said.

He added that the General Fuel and Road Accident Fund levies contribute significantly every litre of fuel sold, but that citizens don’t see tangible benefits from these taxes.

“Currently R6.11 on every litre of fuel is taxed but there are several questions relating to the allocation and utilisation of these funds. For instance, we continue to fund the Road Accident Fund through fuel taxes but it is poorly managed, and a drain on our country’s resources.

“Apart from poor management, have we fully explored alternatives to compensate victims of crashes, and, critically, has the private sector been consulted for their inputs?” Groenewald said.

Another major issue is road safety and its associated costs. Government’s last estimate in 2015 was that road crashes cost the economy around R150 billion annually.

But, Groenewald said, there must be more of a focus on claims management, and on preventing the need for compensation in the first place.

“We are being taxed to pay victims of crashes but nothing is being done to prevent crashes. It’s the same with the general fuel levy: money is being collected but there is little evidence of good governance in its allocation or utilisation.

“Citizens have rightly questioned why they should be paying so much when they don’t see the results of what they’re paying for. It’s unfair,” he said.

The AA said private sector involvement in dealing with rising fuel costs has now become inevitable, and that it remains committed to working with government in the interest of consumers.

Long-term problem 

In a separate presentation, the  Department of Mineral Resources and Energy warned that the closure of refineries in South Africa could have long-term impacts on fuel supply security.

The department said that Engen has expressed a wish to repurpose the refinery into an import terminal – this would mean the current processing of crude oil would stop.

It added that Shell and BP are in the process of evaluating a number of options including obtaining an owner-operator for the refining asset.

However, the department said that Sasol and Total have not indicated any major changes in strategy.

“If not carefully managed, the closure of Refineries has longer-term impacts on supply security,” it said. “Other than just petrol and diesel, the impact of closure would impact on paraffin and liquefied petroleum gas.”

It added that each refinery has an average of 1000 employees who will be affected by any refinery closure, “Closure leads to de-industrialisation and loss of engineering expertise,” it said.

It added that base chemicals, Bitumen and Fuel Oil would have to be imported if refineries were to close.

Fortunately, recent incidents at local plants have to some extent demonstrated some robustness of the supply system, it said.

More dependent 

South Africa will grow even more dependent on imports for its fuel needs as the country’s refining sector faces an uncertain future, said Avhapfani Tshifularo, executive director of the South African Petroleum Industry Association (SAPIA).

In a January interview with S&P Global Platts, Tshifularo said all six of the country’s refineries are currently ‘under review’ and some of them “will have to make some very difficult decisions”.

The likely scenario will be to either “to convert a refinery into import or dispose (of) the refinery altogether” instead of an expensive upgrade program, he said.

Tshifularo said that Eskom’s load shedding in 2020 means the country is already in “import mode”, and along with environmental and regulatory pressures, imports are becoming increasingly attractive to meet demand for higher quality fuels, compared to home production.

“Without any financial support they are not going to invest in an upgrade. The world has moved on now,” he said. “If there is any investment, it will be very minimal, and will be done just to stay in the game.”

It could be 75% cheaper to convert a refinery into an import facility than to upgrade it, Tshifularo added.