Crude oil prices tumble

CRUDE oil prices around the world have been crashing amid Covid-19 travel restrictions and lockdowns, but Zimbabwean fuel prices are unlikely to fall due to the exchange rate matrix.

By yesterday crude oil was selling between US$18 and US$30 a barrel of 159 litres, a third to half of the pre-Covid-19 price, as storage facilities fill and reserves rise to unprecedented levels.

With most motorists around the world limited or banned from driving, most airlines grounded or offering very reduced services, and the falling demand for heating oil in most developed countries as the northern hemisphere spring raises temperatures, demand is low.

But even those low prices mean that a litre of crude costs US$0,17 at the nearest to a standard price, and Zimbabwe does not buy crude, it buys refined petrol and diesel.

These prices will be falling, but at a lower rate. At the present fixed interbank exchange rate a litre of crude still costs $4,25, and the crude oil component in the final Zimbabwean price is not the largest input.

On top of the cost of the refined fuels, Zimbabwe has to pay in foreign currency shipping charges from refinery to Beira, the port charges there and the pumping charge across the waist of Mozambique.

These Mozambican charges, by treaty and custom, are always fair and reasonable, but are payable in foreign currency. Many of these transport charges are fixed charges, and are not affected by movement oil prices.

Once the petrol and diesel reaches the Feruka terminal near Mutare, these accumulated forex costs are converted to Zimbabwe dollars at the interbank rate.

Before the Covid-19 pandemic, the forex charge was close to US$0,60 a litre, and while it is now falling much of that potential gain has been absorbed by a rising exchange rate, temporarily fixed at $25 to US$1.

After converting the landed cost into Zimbabwe dollars the formula used by the Zimbabwe Energy Regulatory Authority to set the maximum retail price adds on the pumping charge from Feruka to Msasa in Harare, not a large charge, then the excise duty set by Parliament, the largest single local currency figure, then the mark-ups for oil companies and service stations.

Most of these charges are set as a percentage of the landed cost in Zimbabwe dollars.

The oil companies bear the cost of road transport from Msasa to their service stations and the service stations have their own costs to pay out of their mark-ups before making a modest profit.

Generally fuel prices in Zimbabwe, because of all the transport and tax charges, are largely driven by the exchange rate fluctuations rather than swings in crude oil prices.