Fuel prices in South Africa: mixing markets and regulations

(November 29, 2016)

Retail fuel prices in South Africa have remained steady at about 11-12 ZAR per liter for several years despite the large drop in oil prices since 2014. One of the reasons is that the South African currency, the rand, has depreciated during that time. Because oil is purchased internationally in USD, a depreciating national currency makes oil more expensive and pushes retail prices up. With the effect of cheaper oil and cheaper currency canceling each other, the retail fuel prices have not changed much.

That, however, is not the entire story. Crude oil prices and the exchange rate explain only about 60 percent of the changes in retail fuel prices in South Africa. That is significantly less than in many other countries where these two factors account for over 90 percent of the changes to fuel prices. The reason is that prices in South Africa are regulated by the government. Although the formula that sets prices takes crude oil and the exchange rate into account, it also reflects a number of additional factors including domestic and international shipping, insurance, coastal storage, wholesale and retail margins, petroleum pipes levy, taxes, and other factors (see more detail).

The formula produces a monthly benchmark price for gasoline, diesel, and other fuels. If prices during the month were lower (or higher) than the benchmark, then the regulated prices are revised up (or down) in the subsequent month. Hence, the pricing formula takes into account a multiple of factors and is somewhat backward looking as it reflects market developments with a one month lag. Moreover, the formula incorporates the refineries’ prices in the Mediterranean area, the Arab Gulf and Singapore and not the Brent oil benchmark.

Notice also on the chart that the USD/ZAR exchange rate moves closely with the price of a barrel of oil. It is typical for the value of the USD and the price of oil to move in opposite directions but, in the case of South Africa, this inverse relationship is very strong.

In short, fuel prices in South Africa resemble what in international finance is called a managed float: markets do influence the prices but government policy also plays an important role. That, of course, complicates forecasting but probably lowers the potential for unpopular wide swings in fuel prices. Here are the latest gasoline prices and diesel prices in South Africa. Please feel free to contact us if you need our latest forecast of fuel prices in South Africa.

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