Government to sell stored oil so it can cut fuel levies this month

Agreement on a ‘two-phase approach’ of immediate intervention

THE GOVERNMENT will sell millions of barrels of strategic crude oil reserves to the market in a bid to recoup the R6 billion tax revenue it sacrificed to mitigate rising fuel prices.

This sale of strategic oil reserves is the first since the government controversially sold 10 million barrels of oil reserves to private companies at heavily discounted prices between December 2015 and January 2016.

The government yesterday announced a temporary reduction in the fuel price to help struggling motorists amid another expected record hike in April. This comes as the escalation in global oil prices due to the global economic recovery and the conflict between Russia and Ukraine has placed significant pressure on domestic fuel prices.

The latest data from the Central Energy Fund shows South Africa is on track for a petrol price increase of between R1.80 and R1.93 in April, while diesel is expected to increase by between R3 and R3.14 a litre.

National Treasury and the Department of Mineral Resources and Energy jointly announced measures to provide short-term relief to consumers and to reduce fuel prices over the medium term. Finance Minister Enoch Godongwana said the two departments had agreed on a “two phase approach” consisting of an immediate intervention for the next two months.

A package of measures to reduce prices when the temporary measures end after two months will also be considered. First up, Godongwana said the general fuel levy will be temporarily reduced by R1.50 a litre from Wednesday next week to the end of May.

This will reduce the general fuel levy for petrol from R3.85 a litre to R2.35 a litre and reduce the general fuel levy for diesel from R3.70 a litre to R2.20 a litre for two months.

These amounts exclude other levies such as the Road Accident Fund levy and the carbon fuel levy.

Godongwana said it was estimated that the partial reduction in the fuel levy will cost around R6 billion in foregone tax revenue for the two-month period.

However, he said the revenue foregone by the reduction in the levies will be recouped through a sale of strategic crude oil reserves, which are held by the Strategic Fuel Fund, a subsidiary of the Central Energy Fund.

“The proposed reduction of the general fuel levy, for a period of two months, will not require adjustments to the annual national Budget, as the proposal is not expected to have an impact on the fiscal framework,” he said.

“The proposed reduction of the general fuel levy will be funded by a liquidation of a portion of the strategic crude oil reserves.”

This decision also puts into perspective the challenge South Africa's economy is facing with rising oil prices, as the country must stock crude oil for at least 21 days in the event of a shortage, which is the equivalent to at least 10.3 million barrels of oil.

Rocketing fuel prices in South Africa have driven up inflation, raised the cost of living through elevated interest rates, and strangled economic activity.

Godongwana said the sale will be authorised by Minister of Mineral Resources Gwede Mantashe and the funds will be deposited into the Equalisation Fund at the Central Energy Fund.

These measures follow the freezing of the general fuel levy and the Road Accident Fund levy announced in the 2022 Budget in February, providing tax relief of R3.5bn.

Meanwhile, Mantashe has proposed a reduction in the Basic Fuel Price of 3 cents a litre to be introduced after the expiry of the temporary measures, from June 1.

Mantashe also proposed the termination of the Demand Side Management Levy of 10c a litre on 95 octane unleaded petrol sold inland, and the introduction of a price cap on 93 octane petrol.

This means retailers can sell below the regulated prices while the termination of the practice of publishing guidance on diesel prices will promote greater competition.

“We are doing all of these things in line with our overall commitment to keeping money in the pockets of South Africans during these trying times, while at the same time restoring the health of our public finances,” Godongwana said.