Adding fuel to the fire

Last Wednesday, South Africans experienced yet another petrol price increase of R1 a litre.

Unfortunately, the bad news did not end there as global oil prices have moved higher ahead of the imposition of sanctions on Iran by the US in November. The rand also weakened further in response to a selloff in global bonds.

Though US President Donald Trump has complained bitterly about the higher oil price, he’s largely responsible for it by pulling out of the Iranian nuclear agreement and reimposing sanctions. Other Opec oil producers, Saudi Arabia in particular, have been unwilling to ramp up output to make up for Iran being shut out of global oil markets.

There’s not much to be done about the local petrol price. About half of the R17-per-litre petrol price is a function of global petroleum prices and the rand-dollar exchange rate.

About 15% represents the margins earned by various players in the value chain, and the remainder various levies. The Road Accident Fund levy is R1.93 per litre and the fuel levy R3.37.

Government could cut those levies, but would then need to raise taxes elsewhere. The fuel levy is expected to raise R70 billion in the current fiscal year.

The impact on the local economy will depend on a number of factors, such as the extent to which motorists can avoid unnecessary trips and the degree to which companies can absorb costs rather than pass them on to consumers.

It’s not good news for the local economy and talk of $100-a-barrel oil, premature as it may be, is a dim prospect.

Higher fuel costs eat into households’ income and businesses’ margins, while increasing the trade deficit and potentially increasing inflation.

The petrol price’s direct weight in the consumer price index is quite small at 4.5%. The question is the second-round impact of firms increasing selling prices to make up for higher input costs.

The weak domestic economy means fuel price increases can be deflationary as businesses and individuals have to cut spending.

While last week’s jobs summit and the stimulus package are steps in the right direction, they’re unlikely to impact short-term economic growth rates.

The SA Reserve Bank is likely to wait a while to assess the second-round impact of petrol prices before hiking the interest rate, but the chance of a rate increase this year has increased.