South Africa’s Petrol Price Structure

The information below was extracted from the former Department of Minerals and Energy which used to exist here: http://www.dme.gov.za/energy/petrol_structure.htm. In 2009, the department was broken up into two parts, one of which is simply the Department of Energy today. You can now find petrol price information here. The petrol price structure determines the income of the Road Accident Fund, and in turn this determines the third party car insurance sums awarded to affected victims.

In that time, the fuel levy increased from 72 cents per litre in 2011 to 96 cents per litre in 2013. Currently, it sits at R1.04 cents per litre.

Petrol Structure

INTRODUCTION

The petrol price in South Africa is directly linked to the price of petrol in US dollars in certain international markets for petrol. The specific markets referred to are those “East of Suez” including, inter alia, the Arabian/Persian Gulf, the Pacific Rim countries and Australasia.

This means that the domestic price is influenced by supply and demand for petroleum products in the international (East of Suez) markets, combined with the Rand/Dollar exchange rate.

The price of petrol in South Africa comprises of two main elements, i.e. the internationally determined element and the domestic element.

1. INTERNATIONAL DIMENSION

1.1 FOB value (product postings)

An average of the “free-on-board” (FOB) petrol prices “posted” (listed) by four international export refineries is used to calculate the FOB portion of the landed cost. These refineries are BP, Mobil and Shell in Singapore and Caltex in Bahrain. The value of these “products Postings” reflects the purchase price for petroleum products should South Africa be required to import significant volumes of these products. The four refineries would be able to supply sufficient volumes of petrol of the right quality and at the most economical freight rates. This figure is based on international prices and it can therefore not be manipulated.

Prior to the nationalisation of petroleum resources and refineries in the Persian Gulf by the Arabian oil producing countries during the early seventies, postings (term prices) in the Middle East were used to determine prices for refined products in South Africa. With conventional market forces neutralised in the Gulf, it was deemed essential to switch to another international refining centre obtaining its crude oil from the same area as South Africa, and which was situated at approximately the same distance from South Africa as the Gulf refineries. Singapore, with its major export refineries, was regarded the best choice. Bahrain was included as a balance to avoid using prices from only one refinery centre.

1.2 Freight

Standard international tariffs from the “Worldscale” publication for voyages from Bahrain and Singapore to SA ports are used as a base. Each month, factors reflecting the latest market trends for different types of vessels are incorporated into a market rate, which is then applied to the standard tariff or “Worldscale”, to determine the freight cost.

1.3 Insurance

Lloyds of London determine insurance tariffs for different voyages according to prevailing risks to and from different areas in the world (for cargo insurance purposes) for different product types. This risk determination is normally a function of two risk elements, namely the inherent risk in shipping a specific type of product (such as volatility) and special risks associated with load or discharge ports due to political or other circumstances prevailing at these ports at the time. For instance, during the invasion of Kuwait by Iraq and the ensuing Gulf war, certain areas in the Arabian/Persian Gulf were classified as high risk war areas and attracted exorbitant insurance premiums.

The 0,1009% of cost and freight applied in the RSA situation represents a low risk tariff for petroleum product shipments.

1.4 Ocean Leakage

In international crude oil and petroleum products trading, shipping and insurance, a loss of 0,5% for crude oil and 0,3% for products has been accepted as a normal leakage/clingage and evaporation loss. Simply put, this means that the “normal” loss is not insurable and has to be accepted by the buyer. The buyer therefore has a financial loss of 0,5% on crude oil or 0,3% on petroleum products imported because payment is made on Bill of Lading Volumes (B/L), yet actual landed volumes are “normally” 0,5% or 0,3% less the B/L volumes.

The sum of the above elements represents the CIF (Cost, Insurance and Freight) cost for products “landed” in South Africa.

By adding landing and wharfage charges (actually charged at 1,8% of FOB value but for purposes of price-determination 1,78% of FOB product value of the shipment) the ‘In Bond Landed Cost’ is arrived at.

2. DOMESTIC ELEMENTS

The In Bond Landed Cost, in US c/gallon, as determined above, is converted to cents/litre by applying the applicable Rand/Dollar exchange rate (four bank daily mean quoted at 11:00 averaged over the calendar month applicable) and a constant litre/gallon factor (3,8038 for petrol).

This IBLC represents the transfer price from the refinery to the marketing division and the difference between IBLC prices for the different products times the percentage yield of the products, for a specific crude oil less crude oil import costs, essentially represents the gross refining margin for the refinery. To arrive at the final pump price in the different pricing zones (magisterial district zones) certain domestic costs, imposts, levies and margins are added to the international price (IBLC).

The import parity (IBLC) principle is an elegant, arms-length method of basic price determination to ensure that local refineries compete with their international counterparts; ensuring cost efficiency and astute crude acquisition strategies to ensure survival in a volatile and competitive international environment, thus eliminating domestic inflationary pressures.

2.1 Inland transport costs (Zone differential)

Transport costs to the different pricing zones are determined by using the most economical cost of transporting the product from the coast (DBN/PE/EL/MB/CT) to the inland depot serving the area or zone. The country is divided into A, B and C zones according to the dominant mode of transport e.g. pipeline (C – zones). The transport cost to the Gauteng area, for example, is based on pipeline tariffs.

2.2 Delivery cost

This element compensates marketers for actual depot related costs and distribution costs from the depot to the end user. The element is calculated on actual historic costs (1 year previously) averaged over the country and industry.

2.3 Wholesale (marketing) margin

The margin is a fixed maximum monetary margin. The formula used to determine the wholesale margin is based on the results of a cost and financial investigation by a firm of chartered accountants (Deloitte & Touche) into the profitability of the wholesale marketers. The level of the margin is calculated on an industry basis and is aimed at granting these marketers a benchmark return of 15% on depreciated book values of assets, with allowance for additional depreciation, but before tax and payment of interest.

The profitability of the wholesale marketers is calculated on the previous year’s results and does not take into account the inflationary increases in the current year. This, combined with margin increases not being implemented at the beginning of the financial year, have resulted in the returns not once achieving the benchmark of 15%.

2.4 Retail margin

The retail profit margin is fixed by the Department of Mineral and Energy Affairs and is determined on the basis of the actual costs incurred by the service station operator in distributing petrol. In this cost structure account is taken of all proportionate driveway related costs such as rental, interest, labour, overheads and entrepreneurial compensation. Petrol service stations selling higher volumes may in some cases achieve a certain advantage as they function at the same retail margin. In many cases, however, higher fixed cost may offset such an advantage.

The model does not provide for a actual net profit component but the manner in which the margin is determined creates an incentive to dealers to strive towards greater efficiency. In doing so, they can beat the average and realise a net profit proportionate to their efficiency.

Service Station Rationalisation Plan

In order to improve the viability of service stations, the Department of Mineral and Energy Affairs administers the Service Station Rationalisation Plan (RATPLAN), which is aimed at rationalising the number of service stations so as to enable them to reap the benefits of increased throughputs and the unit cost advantages flowing therefrom. This also reduces the level of retail margins required.

2.5 Equalisation Fund Levy

The Equalisation Fund levy is a fixed monetary levy, determined by the Minister of Mineral and Energy Affairs in concurrence with the Minister of Finance.

During 1979 the Republic of South Africa found itself in a situation where it could not obtain crude oil without paying a price differential. It became necessary to establish the Equalisation Fund to manage the collection of levies and financing of the price differential. A levy based on retail sales of petroleum products was imposed from January 1979. The companies marketing these products (so called Schedule C Companies) collect the levies on behalf of the Equalisation Fund.

The statutory fund is regulated by ministerial directives issued by the minister in concurrence with the Minister of Finance as laid down by the Central Energy Fund Act, No 38 of 1977 as amended. CEF (Proprietary) Limited manages the Equalisation Fund. The Chairman of CEF (Proprietary) Limited, is the accounting officer of the Fund.

In terms of Ministerial Directives the Fund is principally utilised to smooth out fluctuations in the price of liquid fuel (slate payments); to afford Sasol tariff protection, for synlevy payments to the oil industry for upliftment of Sasol synfuel production and until recently to finance the crude oil “premium”. The Equalisation Fund also funds fire-fighting and security projects at identified fuel installations. These projects are funded out of accumulated levies.

The “Slate” mechanism

The IBLC is a function of daily changing postings and R/$ exchange rate movements. The monthly average of the net effect of these changes determines the actual IBLC for the applicable month. Other domestic price elements may also change from time to time.

The sum total of these changes inevitably influence the pump price.

Petrol prices are adjusted on the first Wednesday of every month. Prices rise and fall in line with movements in the exchange rate and international product prices. The basic price is calculated on the basis of 80% of posted product prices at three refineries in Singapore and one I Bahrain, and 20% of spot prices. The Singapore basket of posted prices has been adjusted to exclude refineries operated by multinational companies with investments in South Africa. The Central Energy Fund administers the system and it is checked by independent auditors.

2.6 Fuel tax

A tax levied by Government.

2.7 Customs & Excise

A duty collected in terms of the Customs Union.

2.8 Road Accident Fund

The Road Accident Fund receives a percentage which is used to compensate third party victims in motor accidents.

In 2013, the average value of a claim from the Road Accident Fund increased to R104,901 from R65,844. That was a 58% increase from the previous reporting period. That is the aggregate figure among the different types of claims made, where the single largest average was that of loss of earnings claims. The average claimant for loss of earnings was compensated with R649,912 in 2013. This was in line with payouts from the non-public car insurance companies.