How fuel prices are calculated in South Africa
The petrol retail price is regulated by government, and changed every month on the first Wednesday of the month. The calculation of the new price is done by Central Energy Fund (CEF) on behalf of the Department of Energy (DOE). The petrol pump price is composed of a number of price elements and these can be divided into international and domestic elements. The international element, or Basic Fuel price (BFP), is based on what it would cost a South African importer to buy petrol from an international refinery and to transport the product onto South African shores.
The diesel retail price is not regulated. The retail margin is estimated to be similar to regulated retail margin on petrol.
1. What is the Basic Fuel Price (BFP)?
The In Bond Landed Cost (IBLC) was first introduced in the 1950s with the establishment of the first refinery in South Africa, and was previously revised in 1995, when a market spot price component was introduced. In a constantly changing world, the use of refinery gate prices posted by international refiners (known as postings) has become somewhat anachronistic in world trade as these no longer track international market prices consistently. This has resulted in the IBLC losing credibility as a reasonable proxy for international fuel prices. The Basic Fuel Price (BFP) formula replaced the IBLC formula on 2 April 2003.
This formula was negotiated in a positive spirit, with government and industry – African Minerals and Energy Forum (AMEF) and the South African Petroleum Industry Association (SAPIA) – agreeing on the new pricing formula, maintaining an import parity price structure. The BFP formula reflects the realistic cost of importing a litre of product from international refineries with products of a similar quality compared to local South African specifications on a sustainable basis.
The BPF formula changes on the first Wednesday of every month based on the average daily international price movements and exchange rate fluctuations based on the ‘3-working day optimisation’ mechanism. This means that the number of days between the first Wednesday of each month when fuel prices are adjusted and the last working day in which fuel price data is collected to determine price changes, will be restricted to 3 working days prior to the price change.
Components of the BFP include:
- International petroleum market spot prices
- Freight cost to bring product to South African ports
- Insurance costs
- Ocean loss allowance
- Cargo Dues
- Coastal Storage
- Stock Financing Cost
2. Domestic Elements
To arrive at the final pump price in the different pricing zones (magisterial district zones) certain domestic transport costs, government imposts, taxes and levies and retail and wholesale margins needs to be added to the international price.
Transport costs (Zone differential)
Keeping in mind the import principle used, this element recovers the cost of transporting petroleum products from the nearest coastal harbour (Durban, Port Elizabeth, East London, Mossel Bay or Cape Town) to the inland depot serving the area or zone. Transport to the different pricing zones are determined by using the most economical mode of transport i.e. pipelines (C zones), road (B zones) or rail (A zones). This is the only element which values differ per pricing zone, and is the reason why the petrol price is not the same for the whole country.
Delivery costs (Service differential)
This element compensates marketers for actual depot related costs (storage and handling) and distribution costs from the depot to the end user at service stations. The value is calculated on actual historical costs of the previous year, averaged over the country and industry.
Wholesale (Marketing) margin
Money paid to the oil company through whose branded pump the product is sold, to compensate for marketing activities. This margin is controlled by the government, allowing for changes based on the oil companies’ return on their marketing assets. The formula used to determine the wholesale margin is based on the results of a cost/financial investigation by a chartered accountant firm into the profitability of the wholesale marketers. The level of the margin is calculated on an industry basis and is aimed at granting marketers a return of 15% on depreciated book values of assets, with allowance for additional depreciation, but before tax and payment of interest.
The retail margin is fixed by DME and is determined on the basis of actual costs incurred by the service station operator in distributing petrol. Account is taken of all proportionate driveway related costs such as rental, interest, labour, overheads and profit. The way in which the margin is determined creates an incentive to dealers to strive towards greater efficiency, to beat the average and to realise a net profit proportionate to their efficiency.
Equalisation Fund levy
The statutory fund levy is a fixed monetary levy, and the fund is regulated by ministerial directives issued by the Minister of Mineral and Energy Affairs in concurrence with the Minister of Finance, as laid down by the Central Energy Fund Act, No 38 of 1977 as amended In terms of Ministerial Directives the Fund is principally utilised to smooth out fluctuations in the price of liquid fuels through slate payments; to afford synfuel producers tariff protection and to finance the crude oil premium (price differential applicable to SA oil purchases during the late 1970’s).
Tax levied by Government annually adjusted by the Minister of Finance effective from the price change in April of each year, announced in the Minister of Finance in his annual budget speech.
Customs & Excise levy
A duty collected in terms of the Customs Union agreement.
Road Accident Fund (RAF)
The Road Accident Fund receives a fixed value which is used to compensate third party victims in motor accidents.
A levy paid by the motorists recovering money “owed” to the oil companies, due to the time delay in the adjustment of the petrol pump price.