OIL PLUNGE
What it means for SA
MOTORISTS and commuters may appreciate a break from rising travel costs thanks to the tumbling price of oil, but a chance has been missed for South Africa to make the most of the situation. Econometrix chief economist Azar Jammine says government should have considered using this opportunity to increase the fuel levy, rather than slashing the price of petrol so radically.
MOTORISTS and commuters might appreciate a break from rising travel costs thanks to the tumbling price of oil, but a chance has been missed for South Africa to make the most of the situation by allowing fuel prices to come down.
Econometrix chief economist Dr Azar Jammine said the hefty recent cut in the fuel price raised the question of whether the government should have exploited the opportunity to increase the fuel levy sharply.
“It’s totally logical at this stage — they said they want to raise an extra R15-billion a year for the next three years in order to reduce the budget deficit, and they can go quite a long way towards that by increasing the fuel levy.”
Normally the government would increase the levy in line with inflation, but if it is raised by a further 10%, no more than 22.5c a litre, that could raise an extra R5-billion in government revenue, Jammine said.
“If the current overrecovery on petrol were to be sustained, we could get another 50c-a-litre cut in the petrol price in February in addition to the last cut.”
Instead of cutting it by 50c, Jammine suggested, the government could keep the price unchanged and increase the fuel levy — so raising almost as much money as it needs without having to raise personal income tax or VAT.
An opportunity was missed with this week’s price cut.
“We could have got away with a massive improvement in our road infrastructure that consumers would have been willing to countenance, without having to bother with e-tolls and new, additional tolls.”
Jammine said oil price movements had been even more unpredictable than usual, with three theories being put forward to explain them.
“There may be some truth in each, although the first two are contradictory,” he said. The first is that Middle Eastern producers are deliberately pumping oil above targets to bring down the shale industry in the US and sustain their competitive advantage. The second is that the US is cooperating with the Saudis by doing the same to make life difficult for the Russians and force them to play ball with respect to Ukraine.
Jammine said the third theory “is that the price drop is a sign that the global economy is weakening much more than we thought”.
Another worrying indicator is that mineral commodities are declining in tandem with the oil price, although not quite as much, reflecting weak global demand.
Supporting the theory of weak global growth and economic instability is that the price of gold has risen above the price of platinum for the first time in many years. Gold is a hedge against destabilisation and bad news, whereas platinum is a more direct reflector of industrial demand.
“It’s not obvious as to which of these factors is dominating at present. I find it difficult to be dogmatic about what will happen to the price, especially with regard to timing. When you get a fall like this, any inkling of a reduction in production by the major producers will see the price rocketing back to $65 or $70 a barrel.”
Jammine said $70 to $80 a barrel sounded like a sensible assessment of where it would end up eventually.
He was less keen on being drawn on the implications for South Africa. Some say the fall in fuel prices is likely to result in an increase in disposable income. “My calculations suggest the decline since August will result in an increase in disposable income among consumers of 1.5%. That’s significant, although not massive.”
But “I’d also be worried if this is a sign of a weakening global economy. Then the fall in commodity prices may continue and erode much of the benefit we would derive from lower import and fuel costs. We could have a huge rebound in the oil price before long.”
If the current overrecovery on petrol were to be sustained, we could get another 50c-alitre cut