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Last week’s column on where the money paid for petrol goes caused quite a stir online and across the social networks. I want to take the opportunity to answer a few questions that came up among the comments.
What is Sasol’s role in fuel supply in South Africa and why is it not cheaper than the international suppliers?
Sasol produces petrol at lower costs than international suppliers yet the government sets a standardised price of petrol for the South African market. This allows Sasol and its shareholders to reap higher margins than international competitors.
Sasol operates as an independent company and is listed on the Johannesburg and New York stock exchanges. However, two of its largest shareholders are the Government Employees Pension Fund and the Industrial Development Corporation. Sasol is also the largest corporate taxpayer in South Africa.
If controls on fuel prices were dropped, there would still be little incentive for Sasol to drop its prices. Prices in an open economy are driven by demand rather than cost and with international markets available, Sasol’s supply to South Africa would change according to the relative attractiveness of other markets. Higher intervention into Sasol to drop prices could compromise the efficiency of its operations and lead to other knock-on effects.
The model currently used is designed to allow Sasol to independently seek profit and have this redistributed through taxes, pensions, and development funds.
If the local petrol price is vulnerable to the rand/dollar exchange rate, why do we not buy oil in the currency of the supplier?
Last year, South Africa imported 23 percent of its crude oil from Nigeria. In theory, South Africa could pay for this in Nigerian naira instead of dollars, avoiding the fluctuations in the rand/dollar exchange rate. This would entail exchanging an enormous sum of rand for the required amount of naira but no exchange will happen if there is no willing buyer and seller. Somebody would need to buy that amount of rand with naira.
Only if there is substantial bilateral trade between two countries – where both constantly have a demand for each other’s currencies – does it make sense to trade in anything but the international currency of trade, currently the US dollar.
If not, the imbalance of supply and demand for one currency or the other makes it infeasible.
Would it reduce the impact of petrol prices (on the economy) if more people started using bicycles?
It would certainly make a difference to the individual’s life and expenses, but even if infrastructure allowed for it, it will always be the minority that can effectively replace their need for a car with a bicycle.
A more effective way of reducing the impact of high fuel prices is to make greater use of public transport and put pressure on authorities where adequate services are not being provided.
South Africans have a nasty habit of complaining about the price after they’ve bought something – if it’s too expensive, don’t buy it. The same principle applies to petrol. Reduce car trips to a minimum, share where possible, and buy vehicles with smaller and more economical engines.
On a national scale, logistics need to be steered back towards rail transport to replace the heavy dependence on road freight and limit the automatic relationship between petrol prices and inflation.
Pierre Heistein is the convener of UCT’s Applied Economics for Smart Decision Making course. Follow him on Twitter @PierreHeistein.