The petrol retail price is regulated by government, and changed every month on the first Wednesday of the month. The calculation of the new price is done by the Central Energy Fund (CEF) on behalf of the Department of Energy (DOE). The petrol pump price is composed of a number of price elements and these can be divided into international and domestic elements.
The international element, or Basic Fuel price (BFP), is based on what it would cost a South African importer to buy petrol from an international refinery and to transport the product onto South African shores. The diesel retail price is not regulated. The retail margin is estimated to be similar to the regulated retail margin on petrol.
After a detailed investigation in 2002, the BFP was implemented in 2003 by the then Department of Minerals and Energy (DME). The BFP replaced the In Bond Landed Costs (IBLC) formula which was previously in place. In 1994, the Liquid Fuels Task Force – then a sub-committee of the forerunners of Nedlac – reviewed the details and made certain changes to make prices more competitive.
The IBLC system used the daily average of five published world oil prices for the product concerned to arrive at the international portion of the regulated price of the particular product. These were the posted prices of three refineries in Singapore, an assessment of the Singapore spot market price and the posted price of a refinery in Bahrain.
In April 2003 the system was changed to use spot prices instead of posted prices. The spot prices used are:
The BFP formula was an improvement in the way the system links to world markets and is still in use. The DOE is in the process of reviewing the BFP to ensure that assumptions used are still relevant and appropriate. If prices are to be controlled, it is prudent for the control mechanism to be linked to world markets.
The cost of shipping and related costs of importing into South Africa are added to these prices. The resultant dollar basic price is converted to rand at the daily $/R exchange rate ruling at 11:00 South African time. The main difference between the BFP and the IBLC is that the BFP is based on the spot prices quoted daily in specified international markets, whereas the IBLC was based on certain refinery gate postings which were found not to be reflective of actual market prices.
There are two main constituents of the prices of controlled petroleum products:
The external factors move constantly and account for most of the monthly movements in prices. Both the world market price of oil and the exchange rate are outside the control of the industry. The Monthly Pricing System, whereby the controlled prices are changed on the first Wednesday of each month, takes account of movements in these factors. When the various internal factors are adjusted – usually once a year – these movements are also included in the relevant monthly price change.
Movements in the rand-based elements (internal factors) are subject to government control. They comprise adjustments in taxes and levies, transport costs, wholesale margins, retail margins and service costs. The overriding rationale of the control of prices and margins should be to ensure that the various stakeholders in the industry earn fair returns. The returns should be sufficient to encourage the needed investment in the industry, while not being such as to represent over-reward.