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By Mike Schüssler

Moneyweb: Economist

Why SA should get a R2-plus drop in the petrol price

The drop would boost retail sales in the most important part of the year for retailers.

Fuel prices could fall by as much as R2.13c a litre bringing the price down to under R15 per litre for the first time May and the lowest petrol prices since the fuel tax was increased in April.

The reason is that petrol has an average over recovery of R1.88 so far this month is mainly due to the falling oil price. The strong rand added about 17 cents to the average over recovery. The average over recovery should be about 191 cents for petrol and 160 cents for diesel.

Many pundits have predicted large falls but the under recovery hides the fact that the slate levy would no longer be necessary as SA uses close to 2 billion litres of fuel a month. According to the DoE, the slate levy finances the cumulative under recovery of the industry and only applies when the cumulative slate balance exceeds R250 million (under recovery).

While the slate was owed R2.2 billion by motorists and truckers, the fact that there was such a massive fall in the basic fuel price that the average over recovery and the slate levy would average over R2 per litre for petrol and about R1.65 for diesel, means that the slate levy shortfall has been wiped clean.

A simple back-of-the-matchbox calculation shows that 2 billion litres times R1.9c (average of petrol and diesel over recovery and slate levy payments) means that the R2.2 billion shortfall had R3.8 billion paid in. The slate should have a surplus of R1.6 billion by today. (I.e. the oil companies would owe the consumer a refund which by the rules they do not have to pay as this is kept in the slate for when prices rise again)

Clearly, a positive slate balance means that there would be no need to continue to charge the 21.92 cents slate levy per litre at present. So dropping the slate levy means that a bigger drop than the average over recovery thus far would be warranted.

The slate mechanism method, however, looks back two months at the balance of the slate levy as it would have been in October for the December fuel prices. But logic says that the huge over recovery has resulted in wiping out any monies owed.

Therefore, the Department of Energy can afford to drop the slate levy for December.

This would result in the largest drop in the history of the petrol price of R2.13. This would represent a decline of about 13% in petrol. It would save the average motorist R275 for the month of December a not small amount of disposable income (remember this is after taxes and other commitments it should allow for about an 8% change in spending.) Retail sales could increase by over R2 billion for example if the extra available income is spent there.

This would certainly help consumer confidence and business confidence. The current drop would boost retail sales in the most important part of the year for retailers and with Christmas also a time of goodwill one can ask taxis and the like to drop prices for people going on holiday.

Overall if the oil price stays around $60 for a year instead of $80 of a few months ago the current account deficit would drop by close to R40 billion! That could add 1% to GDP next year all other prices remaining the same.

The $60 per barrel oil for a year or longer is a strong possibility as US oil production is up 3 million barrels this year alone a fact I nearly missed in the OPEC artificial supply constraints. The US should by the start of 2020 become an oil exporter for the first time since 1949! Yes, the world biggest importer and user of crude oil is likely to actually export in a little over a year from now even if the price drops below $45 for Brent.

If the petrol price stays below R15 per litre for a few months the inflation rate should drop by 0.6% to 0,8% directly and another 0.1 to 0.2% indirectly so that inflation would drop below the midpoint of the inflation target of 4.5%. (Eskom price increases could wipe this out but nonetheless, by March 2019 this is a very strong likelihood.)

The drop in the inflation rate below the 4.5% target also opens hope for a rate decline which could also boost the economy even further.

The department of energy should give SA the full lower price reduction which would help the country add vooma to the economy so that we get the recovery right into next year.

Mike Schüssler is chief economist at Economists.co.za

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