Fuel for speculation

01 August 2014

Cracking the fuel price conspiracy theory

Some throwaway lines have become so part of everyday life that they are believed without a second thought. One we hear often at the Automobile Association is along the lines of “...the fuel price goes down by ten cents one month and then up by 20 cents the next...”. 

The implication is that the fuel price is decided by a politically-connected bureaucrat who is expected to meet a long-term government price rise goal. Or, in a more sinister vein, that the fuel price is manipulated to shape public opinion according to the political needs of the government of the day. Fuel price conspiracy theories have been abundant since back when a three-cent per litre rise in the fuel price was enough to cause social unrest. But they are difficult to believe, because the structure of the fuel price is far more transparent than most conspiracy theorists are comfortable with.

Before the end-July fuel price announcement, a litre of unleaded 95 octane petrol would cost you R14.33, and here, in descending order – and rounded off for convenience - are the components that make it up. Heading the list is the basic cost of a litre of fuel, at R8.58, just about 60% of the pump price. This cost, the so-called “free on board” price, has a structure of its own which is as well-documented and transparent as the makeup of the fuel price as a whole. Next is the fuel levy, R2.25 per litre, making a bit of a mockery of the government's claim that it is unviable to add R0.15 or so per litre to replace e-tolling as the funding source for Gauteng's roads. 

Fuel retailers get R1.39 per litre, and then there's the Road Accident Fund levy of R1.04 per litre, from which road users are compensated for their injuries after a traffic crash. The items mentioned so far total 92.5% of the pump price. There is nothing opaque about any of them. The landed price of fuel depends almost totally on international petroleum prices and the exchange rate; the only forces at play are those of the free market. The Fuel levy and RAF levy are cast in stone once a year at the Minister of Finance's budget speech and remain unchanged until the next year. They too are immune from manipulation, as is the Retail Margin which can only be adjusted by a proclamation from the Minister of Energy. Certainly, none of these amounts is subject to arbitrary hidden adjustment on a month-to-month basis.

With the major components dealt with, let's look at the bit-players on the fuel price stage that make up the remaining 7.5%. Of these, the biggest are the R0.33 zone differential in Gauteng and the wholesale margin of R0.31 per litre which goes to the coastal depots. And then we're down to the “rats and mice” of the fuel price makeup: secondary storage and distribution costs, at R0.17 and R0.12 respectively cover the costs incurred at sub-depots around the country, the Petroleum Products Levy of R0.15 provides another stocking filler for the government and the Demand Side Management Levy of R0.10 is applicable only to 95 octane petrol, to discourage inland motorists from using it where they could make do with cheaper-to-refine 93 octane. 

The rest of the fuel price comprises a  clutch of very small tariffs and levies (like the R0.04 per litre customs and excise duty). These are fractions of fractions in the context of the pump price. 

Which brings us to the question of why people believe that there is anything sinister behind the inevitable fuel price fluctuations we encounter. Assuming a flat exchange rate and constant petroleum prices it would simply not be possible, let alone legal, for bureaucrats to sneak in an increase like the R0.71 / litre jump we saw in April 2013, nor the R0.85 / litre drop two months later. When the fuel price changes, it's either the outcome of strictly regulated parameters and/or market forces, and if there is proof to the contrary, the AA's legal team would be very interested to have a look at it.

The sum of it all is that we are not being hard done by. Fuel prices have risen by about 10% per annum over the past 25 years – higher than inflation, but not so high that we might suspect anything underhanded. That is cold comfort when it comes to ponying up fourteen Rand for a litre of liquid gold, but it certainly puts in perspective the frequent cries of “conspiracy!” when the fuel price gets its monthly adjustment.

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