The fuel price: Must we worry?
PRETORIA – The fuel price will increase tomorrow. The price for 95 octane petrol will increase by at least 18 cents per litre and that for diesel by 25 cents per litre. The price for 93 octane petrol will decrease by 4 cents per litre.
Many people are of the opinion that the uncertainty in the middle east after the missile attack on the main oil, gas and fuel facility in Saudi Arabia during the middle of September, as well as the weaker Rand caused the under recovery in the fuel prices.
A lot of speculation arose that this only will be the start of a spiral of increases to come. One has to be very careful with such an analysis.
The sabotage did destroy 50 percent of the main facility in Saudi and had a direct effect on 5 percent of the world oil supply, causing prices for crude to jump by almost 20 percent just after the incident.
At the same time the rand exchange rate had started to weaken strongly over the last two weeks from a level of around R14.68/$ to the current R15.14/$. One may quickly jump to the conclusion that fuel prices are on the brink of increasing dramatically and that it may cause concern on the South African inflation rate and interest rate.
Even the Monetary Policy Committee of the Reserve Bank declared that they are worried over fuel prices as one of the risk factors that prevented them to cut the repo rate at their last meeting.
The main reason for the under recovery for petrol 95 during September were mainly due to the international prices of basket used in the basic fuel price. This price had increase to 196 US cents per gallon by 17 September, the day after the missile attack, up from 175 US cents per gallon the previous day.
This was the main reason for the under recovery. The same applied for diesel as the price in the basket had increased from 167 US cents to 191 US cents per liter overnight. However, thereafter the international crude Brent oil price started to decrease and has reached levels of close to $61 dollars a barrel on Saturday and traded today at one stage lower than $60.
This means that the basic prices for petrol and diesel in the basket should come down strongly. By 30 September it was already down for petrol to 183 cents and that of diesel to 171 cents, almost the same level as before the sabotage of the Saudi oil attack.
Although the prices for petrol and diesel may indeed increase this coming Wednesday it is far- fetched to believe it is the beginning of a spiral of increases. Given the lower levels of international oil levels currently and a Rand exchange rate that is not much weaker than a month ago, one may found that a strong recovery in fuel prices downwards are more than likely to be on the cards at the beginning of November.
The effect of the proposed increase in the prices for petrol and diesel on the inflation rate also has to be analysed with care. The calculation in the total inflation basket for fuel prices will be based on year-on-year increases or decreases.
In October last year 2018 the price of petrol 95 in fact had increased by 100 cents to R17.08 cents per liter from September 2018. This is 87 cents per liter or 5 percent higher than the new price of R16.21 per liter. The same applies for the price of diesel as the price had increased last year by 124 cents in Gauteng to R15.64 per liter.
This is 80 cents per liter higher than the new price of R14.84. Even here if the price for diesel will increase by 24 cents per liter it is still 80 cents or 5.1 percent per liter lower than last year. Both these prices, therefore, will contribute to lowering the inflation rate in October.
The Reserve Bank made its argument that the fuel price will be a risk during the first quarter of 2020 as the price for petrol was much lower on R14.08 for petrol and R13.14 per liter during February 2019. Therefore, if the Rand stays at its current weaker levels and if the oil price does not come down strongly, then indeed we will have to worry.
Chris Harmse is the chief economist at Rebalance Fund Managers.