The South African Reserve Bank (SARB) says that there is a room for South Africa to update its fuel prices more frequently to better keep up to date with fluctuations in the market.

It also noted that there are at least four ways that the government can intervene and address rising fuel prices in the country – including dealing with one of the biggest tariffs that make up the total.

In a Special Occasional Bulletins of Economic Notes looking specifically at the petrol price, senior SARB economists Zaakirah Ismail and Christopher Wood outlined the challenges in dealing with escalating fuel prices.

The economists noted that fuel prices are a key driver of inflation in South Africa, and over the past decade, administered elements have accounted for between 40% and 60% of the final retail petrol price.

“The most important drivers of fuel price inflation have been the fuel levy, retail price margins and the Road Accident Fund (RAF) levy,” they said.

While there is no simple solution to dealing with the various elements in the fuel price, the economists noted that there are at least four “opportunities” to improve the efficiency of price-setting mechanisms in the domestic fuel price.

These include:

• Reviewing the methodology for calculating retail margins and reconsider proposals to move the petrol price to a maximum (rather than regulated) price.
• Review the viability of the RAF against alternative approaches, notably compulsory third-party insurance.
• Review the methodology for calculating inland transport costs.
• Update several outdated elements of the basic fuel price calculation.

“The methodology for calculating retail price margins can be substantially improved, particularly by reducing excessive owner margins,” they said.

“The RAF levy is much more complex to solve, requiring a reform of the national approach to third-party insurance – but this reform is increasingly justified.

“Meaningful reductions in the fuel levy seem unlikely, given severe constraints on the fiscus and rising road maintenance costs.”

However, one of the bigger suggestions made, is that South Africa update its retail fuel prices more often – possibly to a twice-a-month format.

The economists noted that global benchmarking indicates that other markets update administered prices more regularly than South Africa’s monthly schedule, often releasing new prices every two weeks.

“Given that the calculation of the petrol price is a relatively mechanical process, it would be viable for the DMRE to increase the frequency with which prices are adjusted,” they said.

“This would require additional work on the part of retailers, but would improve the responsiveness of the fuel price and reduce the burden on the slate levy to adjust for short-term imbalances.”

Fuel prices in South Africa are currently changed once a month, with the Department of Mineral Resources and Energy announcing increases or decreases to take effect on the first Wednesday of the new month.

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Review outdated data

When it comes to the various levies and tariffs present in the basic fuel price, the economists noted that there is very little wiggle room to make adjustments. Still, there are places where things can be improved.

Specifically, because many of the cost factors are based on assumptions – and the Department of Mineral Resources and Energy does not review these regularly – many of the methodologies are based on outdated estimates.

“For example, the DMRE methodology for calculating coastal storage costs is based on an outdated base estimate, with the values for costs based on a 2012 study of global average storage costs, which is inflated by the producer price index for final manufactured goods each year (DMRE 2017).

“Given that South Africa has invested heavily in liquid fuel terminals at ports such as Saldanha Bay, the underlying price should reflect these structural changes in the industry, but almost certainly does not under the current methodology,” the economists noted.

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Get retail margins under control

The SARB economists noted that rising retail margins have been the biggest driver of fuel price inflation since 2015 when a new methodology was implemented.

Before 2015, retail margins were assessed through the retail margin determination model. After 2015, this was replaced with a Regulatory Accounting System, which separated out individual margins for activities like retail and wholesale trade and aimed to reflect actual costs and sales volumes more closely.

“For the retail margin, this calculation is facilitated by a benchmark service station, which is meant to offer an indicative representation of costs facing an average petrol station,” the economists said.

However, since then, each component of the retail margin has increased by more than inflation. A review of owner margins – which benefit twice in the calculation – could help reduce prices, they noted.

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The Road Accident Fund levy

According to the SARB, the Road Accident Fund Levy is an outlier, as there are few comparative schemes globally.

The RAF pays for public third-party road accident insurance – however, the more common model of managing costs associated with road accidents is to require mandatory third-party insurance for all drivers, the economists said.

While the RAF is supposed to provide a buffer for the estimated 70% of vehicles on the road without insurance, the SARB economists said the rising cost of the RAF levy means that the additional cost to petrol prices has rapidly eroded the cost-benefit for drivers relative to mandatory private insurance.

“For example, an online quote for third-party insurance for a Toyota Corolla returns prices ranging between R280 to R300 per month (based on a search in February 2023), whereas one full tank of petrol in the same car would pay about R109 in RAF levies.”

The economists conceded that moving to a full mandatory third-party insurance system would be incredibly complex, but stressed that the RAF is ineffective.

“Compulsory third-party accident insurance, alongside a much smaller RAF levy with narrower coverage, could be a viable option to reduce petrol price inflation relatively quickly,” they said.

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Transport costs

While transport costs are a relatively small component of the fuel price, the SARB economists noted that there is virtually no explanation for its rising costs.

“The methodology for calculating transport costs is not publicly available and is perhaps the opaquest component of the petrol price,” they said.

“The DMRE has previously stated that transport costs are calculated by applying the ‘most cost-efficient mode of transport to determine primary transport cost implemented into fuel price structures’, but no detail is available on how this is achieved.”

“There is little that can be said about the transport cost component. which indicates a continued lack of transparency in the petrol price calculation. This, combined with the rapid increases that appear out of step with the evidence, makes transport costs one of a number of components that require review and greater public scrutiny.”

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