By Pierre Heistein
This article was originally published in the Business Report Opinion & Analysis pages on 10 March 2011. To interact with Pierre, visit www.facebook.com/understandingeconomics.
The price of petrol is influenced by the supply and demand for crude oil, exchange rates and local government taxes. To better understand fluctuations in the fuel price, it is best to look at the supply chain of petrol first. Petrol is made from crude oil, which is extracted from the ground and then refined into fuel. It is then exported from the main oil-producing nations to the rest of the world.
Just like almost all other goods, if the supply of oil increases, its price will decrease and if the supply decreases, then prices will go up. As oil is such a large component of petrol, any changes in the price of oil will apply the same pressure to the price of petrol. The recent increases in the fuel price have a lot to do with the political conflicts in the large oil-producing nations of the Middle East. Recent uprisings in countries like Libya and Bahrain are threatening stability within the region and many fear that this will spill over to countries like Saudi Arabia, the world’s largest oil producer. This can change the fuel price in two ways. Firstly, the instability may actually affect oil production by shutting down plants or hampering the transport of fuel. This will decrease the supply of oil and cause the price to increase. Secondly, mere anticipation of future drops in supply will cause other countries to stockpile oil now, thus raising demand for oil and increasing its current price.
The recent price increases can also be attributed to the weakening rand. South Africa is a net importer of fuel and oil is mostly traded in dollars on the international market. If the price of a barrel of oil is $100 and the rand/dollar exchange rate is R6/$1, then a barrel of oil will cost South Africa R600. If the rand depreciates to R7/$1 and the dollar price of oil does not change, South Africa will now be paying R700 for the same barrel of oil. Without doing anything to supply or demand, this weakening of the rand has made oil more expensive for South Africa and will put upward pressure on the petrol price.
An influencing factor that can be expected in the next few years is the increase in the oil price due to a recovery of the world economy. As industries in countries around the world start to grow, their demand for oil and oil by-products will increase, causing an increase in the price.
Finally, petrol in South Africa is a controlled product and the government is responsible for setting its final price. This is why the petrol price does not fluctuated every time there is a change in the price of crude oil, although any movement on the price of oil will influence the decision on the price of petrol. About 27% of the price of petrol at the pumps is government taxation. Currently, for every litre of pertol bought, R1.67 goes to the fuel levy, 4 cents goes to customs and excise duties, and 72 cents contributes to the national road accident fund. Any increases in taxes on petrol will result in an increase in the petrol price. Such increases can be expected in times of a large fiscal deficit and relatively strong growth.
The price of petrol is a key indicator in the South African economy. It affects those who can afford to travel by car, but also impacts all consumers through the increase in the cost of public transport and the transportation of goods. An increase in the price of petrol will inevitably lead to an upward pressure on inflation.
This article is published under the Creative Commons Attribution license.