Fuel price is built on supply and demand economic factor, most export countries manage the supply volume to ensure that they manage the price due to the market forces. At GASPET we will unpack the various components that justifies the increase in fuel price, unpacking the international and domestic influences, the impact of current affairs, and, ultimately how it affects businesses in South Africa.
Factors Justifies increase on fuel price
There are two main categories that influence Basic fuel price (BFP)which may lead to the fuel price to increase, these factors include the impact of the International and Domestic markets. This is also according to Department of Mineral Resources and Energy.http://www.energy.gov.za/files/esources/petroleum/petroleum_pricestructure.html
International Influence
Factors that justify the increase of prices are influenced by the international market and how they manage their supply and demand. But an important factor to include is the exchange of the Rand VS the US dollar and crude oil price.
Free-on board (FOB) values
These prices are determined by the daily exports of the refining centres which are found in the Mediterranean areas including Arabia.
Freight
These transport costs are derived from the export refining centre to the South African ports. Freight rates are used to calculate basic fuel price, they are adjusted every month in line with the so-called average freight rate assessment.
Insurance
An estimated percentage (around 0.15) of Free-on board and Freight covers insurance and other costs such as letters, credits, surveyors, agents, and laboratory cost.
Ocean loss
During transportation, there are encounters where fuel is lost on the way to the designated country. A loss allowance factor of 0.3 percent is calculated on the sum of the FOB, for Freight and Insurance values.
Cargoes duties
The South African harbour facilities are utilized to off-load petroleum products from ships into onshore storage facilities. The cost to utilize these harbour facilities is based on the tariff set by the, https://www.transnetnationalportsauthority.net/Pages/default.aspx
Coastal storage
In 2002, the typical international storage rate was assessed as 3 USD per ton or 2.5 SA cents per litre per month. The BFP only makes provision for 25 days of storage and the initial value when BFP was implemented amounted to 2.083 c/l. This element is adjusted on an annual basis by the increase in the Producer Price Index.
Stock financing
This is based on the landed lost values of refining petroleum products, which also includes stock holding for 25 days.
Domestic Influence
Previously we unpacked the components to calculate fuel price in SA with some examples of these factors, some of those aspects will be included again, in the factors that justifies an increase in fuel price. Distribution Refined fuel at the coast is transported or distributed through road, rail and pipelines. Retail margin The retail profit margin is determined by the Department of Energy, and it’s based on the actual cost sustained by the service stations in selling fuel. This includes taking in accounts rentals, labour, overheads, and entrepreneurial compensation. Tax This amount is presented by the Minister of Finance during budget speech. Taxes include components such as Road Accidents Funds, Equalizations Funds and Customs and Excise duty, fuel levy. Slate These calculations are done every day in the fuel price review period an average for the fuel price review period is calculated. This monthly unit over/under recovery is multiplied by the volumes sold locally in that month and the cumulative over/under recovery is recorded on a Cumulative over/under recovery account (referred to as the “Slate Account”). A Slate levy is applicable on fuels to finance the balance in the Slate account when the Slate is in a negative balance. IP tracer Detaining the unlawful mixing of diesel and illuminating paraffin, an illuminating paraffin tracer dye is injected into illuminating paraffin. An illuminating paraffin tracer dye levy was introduced into the price structures of diesel to finance related expenses.
Fuel Increase on Businesses
South Africa have seen a massive increase in fuel price over the past two years to date, currently diesel’s projected increase in April 2022 is R3.21 and R2.30 for petrol.
The main reason for that is the supply & demand market forces due to the war in Ukraine and the ban on Russian crude. Combined with a devaluation of the Rand.
Th increase in fuel price is very detrimental for a wholesaler like GASPET as price go up, you need to engage more capital to get the same return, gross profit % goes down and return on investment and capital goes down.
References
Department of Mineral Resources and Energy/ petroleum source: http://www.energy.gov.za/files/esources/petroleum/petroleum_pricestructure.html
Department of Mineral Resources and Energy/ budget speech: https://www.gov.za/speeches/minister-gwede-mantashe-announces-adjustment-fuel-prices-effective-5-january-2022-3-jan