In an environment of high fuel prices, there are various debates focusing on strategies for a price reduction.
Much is at stake in South Africa’s fuel industry and careful reflection is necessary before any changes to the retail price structure or price deregulation are considered.
The current fuel pricing structure provides for fixed retail prices for petrol, varying according to fuel zones.
Petrol is cheaper in coastal zones than in inland zones, inter alia, to make provision for transportation costs.
The current regulations prescribe the retail price for all octanes of petrol and filling stations may not charge any other price. Filling stations also cannot give any discounts or incentives for petrol purchases.
There is also a price difference between 95 octane and 93 octane in inland zones, where 93 octane is cheaper. Coastal zones do not offer 93 octane, as 95 octane petrol is necessary in those areas to ensure optimal engine performance for vehicles.
In July 2022, the government announced a consultation process for the price setting of 93 octane fuel. The intention is to introduce a price cap, akin to the current regulated price. If implemented, this will allow filling stations to sell 93 octane fuel below a set maximum price cap. The adoption of this approach will introduce some competition in the market for 93 octane petrol, but not complete competition, as maximum prices will be capped. The responses of filling stations are difficult to predict, but there will be some price variation.
The price cap would bring some relief to 93 Octane motorist as filling stations would be able to run specials and offer fuel discounts to their customers.
Diesel was also regulated at the retail price level. From October 2014 the price of diesel became regulated at the wholesale price level. Filling stations are now at liberty to ask whatever price they want for diesel, with no price cap.
In practice, filling stations charge different retail prices for diesel, depending on the sulfur content. The lower the sulfur content, the higher the price of the diesel.
In the case for diesel, retail prices differ between filling stations, irrespective of sulfur content. Price determination is dependent on competition between filling stations in the same proximity. In areas with no competition, for instance a single filling station on a small town, diesel became more expensive since October 2014.
This will not be the case with 93 octane petrol once new regulations are promulgated. It will not become more expensive, as the maximum price will still be regulated. Any price below the capped price will be based on competition and the cost of operating the filling station. One consequence is that there might be fewer filling stations owing to competition.
The retail margin per litre on fuel sales determines the financial viability of filling stations. This margin is currently R2,29 per litre of petrol for the filling station operator. This gross revenue of filling stations covers expenses such as hiring of the site used for the filling station when not owned by the operator; credit card charges on fuel sales (currently about 40c per litre); wages of pump attendants and administrative staff; and other operational costs. Whatever remains of the R2,29 per litre after costs, is the revenue of the filling station operator.
Professor Jannie Rossouw is a Visiting Professor at Wits Business School.
BUSINESS REPORT