Why we keep paying more for petrol – even when the price of crude oil falls

Bev Mortimer, an old friend  from our Rand Daily Mail days and now editor of the St Francis Chronicle put me onto the subject. She wrote: “Loads of people have been asking me why there are continuous petrol hikes. It has gone up almost every month this year and even though we sometimes see a drop in one month, it always increases by much more in subsequent months! When the crude oil price was at $152 not too far back, we didn’t see petrol this expensive? Please help us understand what’s happening.”

The St Francis community has put its finger on something politicians don’t want us to think about. A creeping cancer called higher taxation – the reallocation of resources from the productive side of the economy (private sector) to the voracious consumers of wealth (public sector). Because it’s disguised as part of a bigger bill, the tax we’re paying at the petrol pump is hidden. But it’s been rising. A lot.

While I was the business editor there, I had a ding-dong one Budget Day on eTV with then Finance Minister Trevor Manuel a decade or so back. He’d just jacked up the levy on fuel in an otherwise well crafted annual Budget. I asked him what guarantees taxpayers had that this wasn’t going to become another heavy burden for taxpayers. Reminding him that one of predecessors, Owen Horwood, promised when introducing sales tax that it would never rise above the initial 2.5%.

Manuel took great exception. Our previously friendly relationship never recovered.

Looking back, it was an argument I’d preferred not to have had. But it was the right line of questioning. In 2001, South Africans paid just 26c in taxes in every litre of petrol. Of that 4c went into the Road Accident Fund. Put differently, of the R3.50 a litre we paid for our fuel, a modest 7.5% went to the State.

Today out of every litre of petrol bought in South Africa, Government takes R3.40c a litre: R2.44 a litre on the Government’s fuel levy slush fund and a staggering 96c a litre to the RAF – the treasure chest of ambulance chasing lawyers. The State’s share of our petrol rand has almost quadrupled to 26%. In only a dozen years.

Tax is the major swing factor in a price equation that’s otherwise quite easy to understand.

South Africa’s pump price fluctuates along with the Rand price of oil. In other words, it’s a function of the US Dollar price of crude and the exchange rate of the rand against the greenback.

I asked the SA Petrol Industry Association for the price of 93 Octane petrol each month in the last 15 years. And courtesy of the excellent EasySoft stock market software from my pals at at Primecharts, pulled the monthly Brent Crude and Rand/Dollar exchange rate data for the same period. A graph plotting the two – oil price in ZAR per barrel; and the petrol price in cents per litre – fit snugly against the same vertical axis.

It quickly shows that Bev and her friends are right to be confused.

In June 2008 the oil price averaged a $141 a barrel. Back then, the stronger Rand rescued us from the worst of it, averaging R7.81 to the US Dollar in that month. Even so, the oil price in Rand terms hit a record of R1100 a barrel. The chart below shows the oil price in rand (blue line) is still below that peak.

But have a look at the red line which reflects what we pay at the petrol pump. The petrol price adjustment lags a month, so that mid 2008 oil price surge worked through in our July 2008 pump price which jumped 73c a litre to R10.56.

That was the most we paid for petrol November 2011 when it hit R10.60 a litre. But here’s where we start seeing the true impact of the creeping fuel tax.

Even though we were paying more at the pump, the November 2011 price of oil was under R900 a barrel – some R200 a barrel (18%) lower than the June 2008 peak.

To emphasise the fact, last month the oil price in local currency was R1061 a barrel. Still R40 a barrel shy of that 2008 record. But we’re paying R13 at the pump now against the R10.56 of 2008. Put another way, because of the way fuel taxes have risen in the last five years, we’re paying almost a third more to fill up our tanks today.

Numbers never lie. So let’s give them the final word. Since 2001 the annual compounded growth rate of oil price in Rands per barrel is 13.47%. The annual compound growth rate of fuel levies and taxes is 24% – four times the inflation rate.

When he reads this, I trust Mr Manuel will have the good grace to blush.

The story of how tax has boosted SA's petrol price. The blue line, Rand per barrel of crude, is still below the 2008 peak.  But the price we pay at the pump is almost a third higher.
The graph showing the story of how tax has boosted SA’s petrol price. The blue line, Rand per barrel of crude, is still below the 2008 record. What we pay at the pump is 30% more than at the peak.

 

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