Questions are being asked about Energy Minister Jeff Radebe’s decision to approve an “urgent temporary fuel price intervention” leaving prices unchanged for September, apart from a 4.9c/l increase in the retail margin for petrol to accommodate wage increases for forecourt staff.
Ahead of the intervention, it was anticipated that fuel prices could rise by some 30c/l on September 5 to accommodate a R550-million-plus under recovery in August, which arose as a result of increases to the oil price and a weakening in the rand.
Department of Energy (DoE) director for fuel prices Robert Maake defended the intervention, saying the decision not to raise prices was taken in an effort to offer consumers some relief while government finalised a longer-term intervention strategy. The strategy should be finalised by the end of September in line with a Cabinet resolution.
During the course of 2017, motorists have been confronted with several large fuel hikes, which precipitated campaigns by the Democratic Alliance and the Organisation Undoing Tax Abuse for a reduction in the fuel levy.
The inland petrol price rose to a record R16.03 a litre in August from R11.24 in January, while coastal prices increased to R15.44 a litre, from R10.83 at the start of the year. Likewise, diesel prices in Gauteng surged from R10.28 a litre in January to a peak of R14.44 in July, before moderating slightly in August.
“We felt that it would be difficult for consumers to absorb another increase at this point in time,” Maake told Engineering News Online, while indicating that government would make further announcements regarding its intervention strategy by the end of September.
He stressed, too, that the August intervention was a temporary measure, which had been communicated with, and accepted by, the oil companies.
“The oil companies are still going to recover their shortfall,” Maake added, without providing specifics as to how the shortfall would be financed.
“The agreement we have with industry is that we will monitor price movements and, when we get to the end of September, we will make a determination as to how to deal with the shortfall.”
Government was convinced, Maake said, that the August under-recovery could be managed without recourse to the consumer. “Otherwise the intervention would be an exercise in futility.”
The September under- or over-recovery would be addressed through the normal adjustments made in the first week of October.
However, Econometrix director and chief economist Dr Azar Jammine remained perplexed by the intervention, its timing and how government intended funding it.
Jammine estimated that the under-recovery in August was R575-million, which would normally have been addressed through an increase of around 30c/l.
He also noted that, as a result of rand weakness and recent oil price increases, the daily under-recovery had risen to around R1.08/l. Should the exchange rate and oil prices experienced at the start of September persist, the under-recovery for the month could exceed R2-billion, excluding the August under-recovery.
Jammine was uncertain as to how the shortfall could be met without significant increases at the pump. He noted that the equalisation fund was valued at zero, while South Africa was no longer in a position to seek relief from its fuel stocks, which had allegedly been sold illegally, and cheaply, by the Strategic Fuel Fund in 2015.
Director of the Wits Business School’s Energy Leadership Centre Dr Rod Crompton was also concerned that the Minister’s intervention could set an unhealthy precedent. He said Radebe’s action appeared to roll back a deal struck between government, organised labour and business in 1993, whereby it was agreed that the previously secret petrol price build up would be made transparent and published daily.
“This is the first time since then that I can recall the government unilaterally hiding an element of the petrol price build up. This is not good for transparent governance.”
A failure to pass through the actual increase, Crompton told Engineering News Online, meant that somebody was absorbing costs that would eventually have to be recouped.
“As to who is funding this, there only seem to be a few possibilities: the fiscus, the oil companies, the slate mechanism or the Equalisation Fund. The Equalisation Fund was expressly created by the apartheid regime for just such manipulation of the petrol price. But as far as I know that fund has been empty for years.”
Crompton warned that the intervention, which appeared premised on either a weakening in oil prices or a strong recovery in the rand, could place government’s finances at risk. “What happens if the price goes up again next month? Betting on the oil price and the exchange rate is not what any prudent government does.”
Jammine said the intervention reminded him of similar interventions made by the National Party government, which eventually backfired. “At midnight on one night in 1979, I recall the petrol price rising from 54c/l to 90c/l.”
However, the South African Petroleum Industry Association (Sapia) was more sanguine, indicating that it had been convinced by government that the intervention was indeed temporary and did not represent a long-term change to the way fuel prices were set.
In response to emailed questions, Sapia executive director Avhapfani Tshifularo told Engineering News Online that the administrative action represented a "sound intervention” that would "hopefully go a long way in relieving the burden on consumers".
In answering a question as to how the intervention would be funded, Tshifularo referred to Section 8(c) of the DoE’s press statement, which reads: “In order to manage a negative balance in the cumulative over/under recovery account (the Slate), a self-adjusting Slate Levy Mechanism was implemented with effect from 7 January 2009. A Slate levy will only be applicable on all petrol and diesel grades if the Slate balance is negative (cumulative under recovery) by more than R250-million."