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Blog : 12 April 2017 (Ever wondered what impact crude oil prices has on the petrol price?)
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We take a look at South Africa's crude oil import prices from January 2010 and compare the price movements of the price per kilogram of Crude oil imports to that of South Africa's retail petrol prices. Are they correlated? One would hope so, as crude oil is the main inset cost into the production of petrol. In addition to this we will take a look at the impact the exchange rate and the international crude oil price has on the petrol price paid at the pump by consumers.
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Crude oil per kilogram vs Petrol Price (95 Unleaded)
The graphic below shows the average year on year growth rate of both Crude oil per Kilogram imported vs Petrol Price at the pump (95 at the Reef).
As can be seen from the graphic above the average price movements of both petrol and crude oil follow very similar trends (even though the level and magnitude of the price movements are vastly different). Crude oil prices are a lot more volatile than that of petrol prices. However looking at the average price movements from 2011 to 2016, the result is very similar. Petrol prices increased by an average of 7.96% per year from 2011 to 2016, while crude prices increased by an average of 5.33% from 2011 to 2016.
Thus over time the growth rates in the Rand price paid per kilogram of crude oil is very similar to the growth rate of the petrol prices consumers pay for at the pump. The strong correlation between crude oil import prices and pump petrol prices are confirmed when calculating the correlation coefficient between pump petrol prices and crude oil imports. The correlation comes out at 0.98 (which basically means that 98% of movements in petrol prices can be explained by crude oil import prices). The other 2% we will put down to taxes and levies (on fuel prices) and extremely volatile crude oil prices.
Thus over time the growth rates in the Rand price paid per kilogram of crude oil is very similar to the growth rate of the petrol prices consumers pay for at the pump. The strong correlation between crude oil import prices and pump petrol prices are confirmed when calculating the correlation coefficient between pump petrol prices and crude oil imports. The correlation comes out at 0.98 (which basically means that 98% of movements in petrol prices can be explained by crude oil import prices). The other 2% we will put down to taxes and levies (on fuel prices) and extremely volatile crude oil prices.
Now the next question is how does the Rand price per Kilogram paid by South Africa for crude oil compare to the price movements of international crude oil prices as quoted daily on most news platforms? The next graphic shows the average growth per year for Crude Oil ($ per barrel), Rand price per kilogram of crude oil, pump petrol prices and the Rand/Dollar Exchange Rate. Please note a positive growth rate in the Exchange rate reflects a depreciation (weakening) of the currency against the Dollar.
From the graphic it is clear that the pump petrol price does not fall as sharply as that of the crude oil (per barrel) and the Rand price per kilogram of crude oil. And this is due to the fact that a large portion of South Africa's pump fuel price is made up of taxes, and therefore a drop in the rest of the costs only leads to a limited drop in the petrol pump price as a large chunk of the fuel price is made up by "fixed costs" such as the taxes, and the variable costs (crude oil price and exchange rate movements) therefore have a limited effect on the petrol price paid at the pump.
To put things into perspective the "fixed" costs of petrol in South Africa amounts to just over R7.00. So of the R13 paid at the pump per litre of 95 unleaded, R7 is going towards taxes, shipping and storage costs etc. More than half the petrol price is made up by costs such as the fuel levy, road accident fund levy etc.
And counting against South Africa too is it's weak exchange rate. If South Africa's exchange rate was stronger over the last couple of years, that paired with significant drops in crude oil prices could have provided much needed relief to South African consumers in terms of lower fuel prices. Sadly the currency is on a steady decline and the average exchange rate each year has been getting worse and worse against the US dollar. The Rand is set to reach its worst average annual level ever in 2017, and this after reaching its worse annual level ever in 2016.
With the Zupta cronies now in charge of South Africa's National Treasury, and South Africa being downgraded to "junk status" by two of the big three ratings agencies, we cant see any light at the end of the tunnel for South Africa's exchange rate.
With crude oil prices recovering from record lows, increased taxes on fuel in South Africa after its 2017 budget and a weakening exchange rate, we foresee petrol prices increasing significantly for South Africans in the next few months, and paired with increased fuel prices we will see increased inflation as transportation costs starts rising. Though times ahead for South Africa.
To put things into perspective the "fixed" costs of petrol in South Africa amounts to just over R7.00. So of the R13 paid at the pump per litre of 95 unleaded, R7 is going towards taxes, shipping and storage costs etc. More than half the petrol price is made up by costs such as the fuel levy, road accident fund levy etc.
And counting against South Africa too is it's weak exchange rate. If South Africa's exchange rate was stronger over the last couple of years, that paired with significant drops in crude oil prices could have provided much needed relief to South African consumers in terms of lower fuel prices. Sadly the currency is on a steady decline and the average exchange rate each year has been getting worse and worse against the US dollar. The Rand is set to reach its worst average annual level ever in 2017, and this after reaching its worse annual level ever in 2016.
With the Zupta cronies now in charge of South Africa's National Treasury, and South Africa being downgraded to "junk status" by two of the big three ratings agencies, we cant see any light at the end of the tunnel for South Africa's exchange rate.
With crude oil prices recovering from record lows, increased taxes on fuel in South Africa after its 2017 budget and a weakening exchange rate, we foresee petrol prices increasing significantly for South Africans in the next few months, and paired with increased fuel prices we will see increased inflation as transportation costs starts rising. Though times ahead for South Africa.
