INTRODUCTION
"Why did the petrol price increase so sharply during the second quarter of 1999?" and "why is the petrol price higher in June 1999 than it was in October 1996, when the rand price of a barrel of crude was about the same  some R100/bbl?" Members of the public posed these questions as petrol prices rose rapidly in 1999. Sapia provides the answers to these questions, also explaining how petrol prices are determined in South Africa and describing how the monthly price-setting mechanism works.
The answer to the first question, about the 37 cent a litre cumulative increase in the petrol price from March to June, initially seems quite straightforward. With the exception of a 4c/l increase in fuel tax and some timing differences on the "under and over recoveries"  which will be put to one side as they self-correct and thus unnecessarily complicate the explanation  the apparent cause was the increase in the dollar crude price. The rand:dollar exchange rate did not move much in the months concerned.
Dollar crude oil prices (Dubai) peaked in October 1996 at $22/bbl and then declined for the next two and a half years till February 1999 when they actually fell below $10/bbl during the month. (See Appendix 5 of this report for monthly average crude oil prices.)
In March 1999 OPEC acted to restrict crude oil production and the world oil market on this occasion responded sharply. The crude oil price rose from around $10/bbl to $ 15/bbl between February and June. In July it rose further and traded at close to $18/bbl.
This increase in the crude price drove international oil product prices up. The basic price  also known as the in bond landed cost (IBLC)  of petrol rose by some 33c/l. This, with a 4c/l increase in tax in April accounts for the cumulative 37c/l increase in the petrol price between March and June.
Yet the full answer is not so straightforward. The relationship between product prices and crude prices varies with world market conditions, as do the relative movements in the prices of different refined products.
That leads to the second question. Appendix 15 sums up the movements in prices of petrol and diesel between October 1996, March 1999 and June 1999, and discloses a significantly different profile in the movements in respect of petrol and diesel.
The common factors are increases in taxes and in certain controlled margins  the diesel retail margin is not reflected in the tables as it is not controlled. (The tax increase on petrol is somewhat greater than that on diesel, a matter that is dealt with on page 35 of this report.) These increases in the "internal factors" resulted in the price to the consumer moving up by more than the movement in the basic price.
The difference is that the basic prices themselves have moved in opposite directions over the three years, petrol up and diesel down.
This means that the petrol price moved up by more than would have been expected (simply projecting the October 1996 crude oil prices) and the diesel price moved up by less. (See appendix 15 for detailed figures).
This is but a brief analysis. Sapia hopes it is of interest and value to those who follow the industry. It demonstrates the dependence of the basic price on trends in international petroleum prices and the exchange rate (known as the "external factors"), and the role that the various rand-based elements (known as the "internal factors") play in determining the price of petroleum products.
Movements in the rand-based elements (internal factors) are subject to government control. They are increases in taxes and levies, transport costs and increases in the oil company marketing margins and the dealer margin.
World oil and financial markets drive movements in the external factors and the dollar:rand exchange rate, and these movements are dealt with through the monthly price adjustment system.
This system is based on the daily average of five published world oil prices for the product concerned. These are the posted prices of three refineries in Singapore, an assessment of the Singapore spot market price and the posted price of a refinery in Bahrain. The cost of shipping and related costs to South Africa is added to these prices. The resultant dollar "basic price" is converted to rand at the daily dollar:rand exchange rate ruling at 11h00.
As it would be cumbersome to adjust pump prices daily, the average price ruling during the previous month is used as the price for the next month, with the actual price change taking place on the first Wednesday of each month. There are detailed "working rules" dealing with the timing effects and the under and over recoveries that result from this use of the previous month's price.
The whole system is managed by the Central Energy Fund and is subjected to monthly audit and is fully transparent.
In today's "global village", if prices are to be controlled, it is wise that the control mechanism be linked to world markets as the South African system is.
The over-riding rationale of the control of prices and margins should be to ensure that the various stakeholders in the industry earn fair returns. The returns should be sufficient to encourage the needed investment in the industry, while not being such as to represent over reward.
The control systems in place should encourage efficiency. This is true of the systems which control the margins earned by the oil companies. For example, the marketing margin control system - MPAR - by allowing a return based on industry aggregate figures enables each company to seek to beat the average. As the companies strive to do this by improving their revenues and containing their costs and investment levels, upward pressure on the industry margin is contained, benefiting the consumer - a virtuous circle.
Those who wish to have more detail on the monthly pricing system than it is possible to give in this brief synopsis, are invited to contact Sapia.
Petrol prices in certain neighbouring states were, at the time of going to press, significantly lower than the price in South Africa. The reasons for this were lower level of taxes and imposts included in the prices  some 30 to 40c/l lower depending on the country  and delays in implementing the price increases necessary to recover the higher international oil prices.
It is noted that at the time of going to press world crude oil prices (Dubai) had risen to over $22/bbl, resulting in further increases in petrol and other petroleum product prices.