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The worst case scenario for petrol in South Africa: economist

March 18, 2022
The worst case scenario for petrol in South Africa: economist

While some experts have warned that South Africa’s petrol prices could climb to as high as R40/litre on the back of Russia’s invasion of Ukraine, this is highly unlikely, says Efficient Group senior economist Dr Francois Stofberg.

Instead, the Efficient Group’s ‘extreme scenario’ would see petrol reach somewhere around R30/litre – and several things would have to go very wrong in the coming months to reach this price.

“Before the last fuel price increase in South Africa, oil prices were trading around $105 a barrel. In our view, oil prices can reach $200 a barrel, although an upper limit around $185 is more probable,” Stofberg said.

“The simple fact is that the world cannot completely boycott Russian oil and gas. At least not overnight.”

At these extreme levels, and considering the stickiness of oil prices, every company and country will be motivated to produce oil, he said.

“The rand has also been strong and should remain so in 2022. I doubt that we will see an average rate higher than R15.50, but even R14.50 is likely. But let us assume that oil prices go up to $185  – from the $105-level it was trading before the last fuel price increase – and the rand depreciates to R15.50 (from R15.00), this would imply that the cost per barrel in South Africa would increase with 80%.”

Stofberg noted that motorists currently pay R21.35 for unleaded 93 petrol inland, but only R10.90 (51% of the total price) is oil-related. The remaining 49% of the price is taxes and costs that go to producers and distributors in South Africa, he said.

“So, even if prices increase 80%, consumers will only feel 51% of that 80% price increase (40.41%), meaning that fuel prices will most likely, in a worst-case scenario, only go up to around R30 a litre.”

The indirect impact of fuel prices

“It is somewhat true that if fuel prices increase, ‘everything’ becomes more expensive – but too many South Africans believe that everything becomes unbearably expensive,” said Stofberg.

“My barber is probably not going to charge me more because fuel prices have increased, neither will my gym fees increase. My insurance, bond (or the rent that I pay), or car repayments are not increasing.”

These items constitute a much larger share of household expenses than food prices, which everyone is concerned about, he said.

“If you want a more accurate estimate of the indirect impact of higher fuel prices, it is better to consider the share of ‘petroleum products’ as inputs among producers.

“According to Stats SA, this share is 8.8%. So, if fuel prices are increasing by 40.41%, producer prices can increase between 3.56% and 12.36%.”

Fortunately for consumers, and considering historic price increase differences between consumers and producers, producers will, at most, only be able to pass on about 25% of this increase, although it might be a lot lower. In doing so, producers might add another 1.71% to the CPI, he said.

“In total, including direct and indirect impacts of a worst-case scenario, where oil prices increase to $185 a barrel for a prolonged period, and the rand depreciates to R15.50, consumer prices in SA might increase from the expected 4.5% to 7.51%.

“In the context of South Africa’s high historic inflation rates, 7.51% does not really warrant all the hysteria that we currently see in the media.”-bustech

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Last modified on Friday, 18 March 2022 16:39
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