The Great Petrol Debate

If things stay as they are, South Africans will face another petrol price increase next month, despite Brent crude oil trading at about $40 a barrel.

Central Energy Fund daily data show that in the period between 30 January and Friday last week, petrol has under recovered by more than 53 cents per litre, raising the prospects of yet another increase in the retail price of petrol next month. Diesel and paraffin have, however, continued to over recover.

The increases in the petrol price have raised questions because they come at a time when international oil prices are relatively low. Not only are oil prices down but they look set to remain so for a while. Australian investment bank Macquarie cut its forecast for Brent crude oil prices for this year by over 20 percent last month to an average $59 a barrel. It attributed the cut in forecast to weaker world oil consumption and high stock levels. In fact, it is accepted that recession in the world's leading economies will slow the demand for oil.

South Africans have come to believe that, while it may not be good for other aspects of the economy, a low international price has its upside – lower fuel costs. As many learnt last month, this is not a foregone conclusion. There are other factors in the determination of the petrol price than the international oil price alone.

The cost of petrol is set to increase
It is these factors that seem to irk a section of local fuel retailers. The increase in the retail price of petrol this month was the tipping point for the South African Petroleum Retailers' Association (Sapra). The increase was enough to elicit an outburst from Peter Noke, Sapra national director.

"I have received numerous inquiries from our members and from motorists who question why, when the international price of oil is at a low, the cost of petrol is set to increase by such a significant margin – especially since the price of diesel will continue to reduce. It does not appear to make sense," Noke said.

There are long-standing suspicions that refiners are in a position to manipulate the pump prices of petrol and diesel. "Essentially, the issue has been that refining margin for petrol grades has been negative for a while and it is now correcting itself. The refining margin, remember, is the cost of buying finished products as compared to the cost of importing crude oil," says Nhlanhla Gumede of Deloitte Consulting.

Refining margin is the difference in value between the products produced by a refinery and the value of the crude oil used to produce them.

This difference is the number that justifies local production of petroleum products from crude rather than importation of finished products, Gumede says.

"Some common misunderstandings"
He says the reason for the correction of the refining margin was not clear "except to speculate that the market is correcting the demand from the barrel which has been skewed by the switch in the US towards diesel".

Dave Wright, GM for corporate planning at petroleum group Engen, says the increase in the retail price of petrol was questioned because of "some common misunderstandings". Among these were the assumption that the international crude oil price alone determined the price of fuel.

"While there is a strong correlation, crude oil is not the only factor. Our prices are influenced by many factors, including global demand, refining capacity, freight rates and competition in different markets. The most influential factors are, first, the price of international petrol and diesel, and, second, the rand dollar exchange rate," says Wright.

Economist Doret Els of the Efficient Group says petrol and diesel prices were moving in opposite directions because of the difference in how they were affected by the global economic slowdown. He says diesel is more vulnerable to unfavorable economic conditions. "With the slowdown, activities that drive diesel consumption – such as freight shipments – have declined. That is why diesel is coming down," Els says.

The demand for petrol, on the other hand, is less exposed to global trades as it is driven mainly by commuter and "discretionary" road travel. "These have not been severely impacted by the global economic slowdown," Els says.

Wright says that beyond next month, international diesel prices are likely to remain soft because of the continued drop in demand.

Fuel price changes will be announced on Friday, to come into effect on Wednesday next week.

Business Day

Article By: Siseko Njobeni