The continuing effects of the great social and economic dislocation of the past two years hit South Africans hard in 2022, with the department of mineral resources & energy announcing that petrol and diesel prices would reach record highs.
Over the past couple of months the spike in fuel prices has been driven, ironically, by the buoyancy of global economies that were slowly recovering from the effects of the pandemic, which had dented demand for oil across the globe. As economic activity recovered, the oil price inched upwards to reflect increased demand. That organic change in fuel prices was unfortunately succeeded by a forced price escalation caused by Russia’s invasion of Ukraine.
The great dilemma facing world leaders is how to put a squeeze on Russia’s ability to finance the invasion through its gas sales while avoiding bringing recovering economies back to gridlock. Given the complicated nature of long-term supply contracts and limitations on global shipping and supply chains, the immediate cutting off of Russian energy proved impractical for its customers.
The undocumented approach to the crisis was the hope that the conflict would be over in a matter of weeks rather than months. As it continues, with little sign of a resolution, the stability of the oil and gas markets has remained precarious. Countries with strategic reserves, which are generally used in times of extraordinary disruption, have been trying to contain the fallout by releasing them to the market. This measure is unfortunately short term in nature and has done little to reduce prices across the globe.
Another manifestation of the problem is the conflict with traditional economic fundamentals. In the US, for example, President Joe Biden has appealed to oil companies to ramp up output and explored measures to lower prices at the pumps through calling for a suspension of federal taxes. The problem with such recommendations is that refinery capacity is impossible to expand in the short run.
On the other hand, cutting taxes has the unintended effect of widening access and increasing demand, which in turn introduces upward pressure on prices. Given the large fuel volumes used by the US economy on a daily basis, the risk posed by the Biden proposal is that it could spike demand and push prices higher for the market at large.
In SA, our usage is a fraction of global output and hence such a risk is far lower. In the past few months, the department has provided some relief in the form of a reduced levy. This moratorium of R1.50/l assisted in delaying the increase to the record levels we see now. The department’s announcement that the concession is reaching an end reflects the government’s high reliance on taxes and levies generated by the oil market.
As the country copes with a fragile national fiscus, depressed economic base and high unemployment, the need to fund the social programmes so many citizens depend on means the latitude for taking creative decisions is severely constrained. The opposition DA has suggested that SA should deregulate the market altogether to assist citizens. This proposal seems to be premised on the idea that it is the regulation of the market, rather than multiple layers of taxes and levies, that is the main driver of high prices.
The more accurate assessment is that SA has built a high reliance on these taxes and levies over time, with little in the way of exploring alternatives. It is these additional taxes and levies that need attention. Complete deregulation on its own will simply create a wildly erratic market that will leave consumers unable to even estimate what the price at the pump will be from one day to the next.
• Sithole (@coruscakhaya) is an accountant, academic and activist.
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