AS tensions escalate in the Middle East, a region pivotal to global oil production, motorists in South Africa have suffered a huge knock as they prepare for significant increases in fuel prices.

Petrol is expected to rise by approximately R4 to R5 per litre, while diesel prices may surge by as much as R13 per litre. However, the price that consumers see at the pump is shaped by a far more intricate set of factors than just the crude oil prices frequently highlighted in news.

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The basic fuel price model:

The Department of Mineral and Petroleum Resources (DMPR) explains that South Africa’s local fuel price is determined by an import parity model called the Basic Fuel Price (BFP).

“The underlying principles for the basis of determination of the BFP are to represent the realistic, market-related costs of importing a substantial portion of South Africa’s liquid fuels requirements, and it is therefore deemed that such supplies are sourced from overseas refining centres capable of meeting South Africa’s requirements in terms of both product quality and sustained supply considerations. The petrol price in South Africa is therefore directly linked to the price of petrol quoted in US dollars at refined petroleum export orientated refining centres in the Mediterranean area, the Arab Gulf and Singapore,” the department said in a statement.

Consequently, three primary global factors immediately impact local pricing: the international price of crude oil, the worldwide supply and demand for petroleum products, and the exchange rate between the South African rand and the US dollar. When tensions flare in oil-producing areas such as the Middle East, concerns about supply disruptions typically push global oil prices upward. At the same time, if the rand weakens against the dollar, the cost of importing fuel increases further, intensifying the effect on consumer prices.

International influences

There are a number of international factors that also influence the price.

• Free-on Board (FOB) values: These are petroleum product prices quoted daily by export orientated refining centres situated in the Mediterranean area, the Arab Gulf and Singapore.
• Freight: The cost to transport refined petroleum products from these export refining centres to South African ports.
• Demurrage: Petroleum products are loaded into ships at ports in the Mediterranean area, Arab Gulf and Singapore and these products are discharged at South African ports.
• Insurance: An element of 0.15% of the FOB-value and freight to cover insurance as well as other costs such as letters of credit, surveyors’ and agents’ fees and laboratory costs.
• Ocean loss: A loss allowance factor of 0.3% to be calculated on the sum of the FOB, Freight and Insurance values for products is applicable to provide for typical uninsurable losses during transportation of fuels.
• Cargo dues (wharfage): The South African harbour facilities are utilised to off-load petroleum products from ships into onshore storage facilities. The cost to utilise these harbour facilities is based on the tariff set by the National Ports Authority of South Africa.
• Coastal storage: This is to recover the cost of providing storage and handling facilities at coastal terminals.
• Stock financing: Stock financing cost is based on the landed cost values of refined petroleum products, 25 days of stockholding and the ruling prime interest rate less 2%.

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Domestic influences

Once the fuel arrives in South Africa, an additional layer of domestic costs is factored into the final retail price.

• Inland transport costs: Refined petroleum products are transported by road, rail, pipeline and by a combination thereof from coastal refineries to inland depots.
• The wholesale margin: The margin is a fixed maximum monetary margin. The formula used to determine the wholesale margin is based on a set of Guidelines, namely the Marketing-of-Petroleum-Activities Return.
• Retail profit margin: The retail profit margin is fixed by the Department of Mineral Resource and Energy and is determined on the basis of the actual costs incurred by the service station operator in selling petrol.
• The General Fuel Levy: A tax collected on every litre of fuel aimed at funding general government spending.
• The Road Accident Fund levy: It is adjusted annually and funds the Road Accident Fund to compensate victims of road accidents.
• The Carbon Fuel Levy: Aimed at reducing emissions
• The Customs and Excise Levy: A tax imposed by the SA Revenue Service

With ongoing instability in the Middle East exerting pressure on global oil markets, South Africa’s dependency on imported fuel makes the country particularly vulnerable to price shocks.

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