Money and Markets

Here’s what the shock oil crash could do for South African petrol prices

Business Insider SA
Brend crude oil price. Source: Markets Insider
  • The oil price has suffered its biggest slump in almost thirty years as a price war erupted among producers.
  • This could mean welcome relief at the pump in the first week of April - just when a 25c/litre hike in taxes is supposed to take effect.
  • Still, there is some risk that this prospect could still be derailed. 
  • For more stories, go to Business Insider SA's home page.

As their retirement investments are being decimated by plunging markets, at least local motorists may be comforted by the likelihood of fuel price relief in the next months.

The oil price crashed by more than 30% on Sunday night after Saudi Arabia launched a price war following Russia's refusal to cut its output. The oil cartel Opec wanted to put a squeeze on supply in the market by cutting production - but Russia remained defiant. In reaction, Saudi Arabia lowered its prices by up to $8 a barrel – an unprecedented move which sent the market into a tailspin. The oil priced suffered its biggest loss since the Gulf War in 1991.

By late-morning on Monday, the Brent crude oil price was down 20% to $35 a barrel. 

Independent analyst Johann Biermann compiled a graph of the oil price in rand which shows that it is currently around R530 a barrel – from more than R1,000 in April 2019:

Oil price in rand. Source: Johann Biermann

This is very good news for SA consumers, Biermann said.

South Africa imports the vast majority of its fuel, and is therefore completely dependent on the oil price. In January alone, South Africa imported more than R16 billion in oil – almost 16% of total imports.

Every month, the department of energy fixes the petrol price based on the price of Brent crude oil and the rand/dollar exchange rate. The Central Energy Fund also releases a daily calculation, which gives an indication of where the petrol and diesel prices are heading.

On Friday – before the oil crash – local fuel prices already looked set for large cuts in the first week of April. The CEF calculated prospects of a price cut for 95 petrol of around 64c a litre, while 93 was on track for a 64c fall and diesel prices by around 78c.

However, while the oil crash will probably mean lower fuel prices next month – the full effect will be muted by a couple of factors.

Firstly, the rand has also weakened amid the global market turmoil. It briefly touched R16.97/$ on Sunday night, but recovered by Monday mid-morning, when it was trading at R15.91/$. Still, it was at around R15.60/$ on Friday before the crash.

The other factor is the full brunt of new fuel taxes, which will come into effect at the start of April.

In last month’s Budget, finance minister Tito Mboweni announced that the fuel levy would increase by 16c and the levy for the nearly insolvent Road Accident Fund (RAF) – which the Treasury said is the state’s second-largest liability after Eskom – will increase by 9c from the beginning of April.

This means that the oil price impact will have to be at least bigger than 25c a litre for it to start making a difference in the price at the pump, says Layton Beard, spokesperson of the Automobile Association of South Africa.

In total, South Africans will, from April, pay R5.88 in tax on each litre of fuel. 

For the petrol price to see a massive cut next month, the oil price will have to remain at these levels, and the rand must also remain relatively stable.

Given that Moody’s may cut South Africa to “junk” as early as this month, and the Reserve Bank could lower interest rates next week (which makes the rand less attractive to foreign investors), the latter may be the bigger risk.

Compiled by Helena Wasserman

Receive a daily update on your cellphone with all our latest news: click here.

Also from Business Insider South Africa: