Diesel disruptions and early hikes point to possible gap in pricing framework

Government and the liquid fuels industry insist that recent disruptions to diesel supply in parts of South Africa are not related to a physical shortage of the fuel in the country.

However, the Department of Mineral and Petroleum Resources (DMPR) and the Fuels Industry Association of South Africa say that ongoing reports of shortages, as well as price hikes ahead of the monthly adjustment date, have exposed a possible vulnerability in the way the diesel price is set that needs attention.

While the price of petrol is fully regulated, diesel prices are not, with the DMPR publishing a monthly reference price for diesel as a guideline. As a result, wholesalers and retailers are free to set their own selling prices, resulting in differing prices from one site to another.

With indications that the diesel price could rise by well over R9/l next week based on an analysis of the current under-recovery on the fuel using the Basic Fuel Price (BFP) formula alone, there are reports of pre-buying by individuals and enterprises seeking to beat the hike.

However, there are also reports that retail prices have been adjusted upwards at some service stations, as well as commercial buyers being quoted far higher prices to receive diesel on contract.

HIKES ANNOUNCEMENT ON FRIDAY

On Friday, March 27, the DMPR will announce a new reference price for April covering various diesel grades, alongside the new prices for various grades of petrol and illuminating paraffin, as well as a maximum retail price for liquefied petroleum gas.

Based primarily on oil price and exchange rate dynamics, which have moved sharply as a result of the attack on Iran by the US and Israel and subsequent disruptions to shipping in the Strait of Hormuz, the BFP formula administered by the Central Energy Fund (CEF) points to material under-recoveries in March.

The most recent CEF daily report shows an under-recovery on 'Petrol 95' of R5.72/l and R9.81/l on 'Diesel 0.005%'.

However, the BFP is not the only factor, given that a significant portion of what consumers pay at the pump is made up of taxes and regulated costs.

In March, a litre of Petrol 95 purchased in Gauteng cost R20.30/l, with levies and taxes comprising R11.64/l and the BFP R8.66/l.

Levies are also set to rise in April following recent adjustments to the General Fuel Levy, the Carbon Fuel Levy and Road Accident Fund Levy in the February Budget. Unless there is an intervention to delay the introduction of these levies by the Finance Minister, these will add a further 21c/l in April.

Should all the adjustments be included in April, fuel prices will rise to levels last seen in mid-2022, after Russia invaded Ukraine, when Petrol 95 rose to above R26/l.

However, Fuels Industry Association of South Africa CEO Avhapfani Tshifularo acknowledges that recent developments in relation to diesel have also pointed to "artificial demand" having been created as consumers moved to beat the price increases.

Some retail suppliers, meanwhile, have reportedly used the space created by the fact that diesel is not regulated to hike prices ahead of the adjustment date.

In addition, some commercial customers, who buy diesel on contract, have reported being quoted prices well above the guideline during the month of March, and with hikes implemented well ahead of the April adjustment.

GAP EMERGES?

Under the current system, short-term losses experienced by suppliers in a particular month are meant to be addressed through the 'slate account', a mechanism that keeps track of these gains and losses and recovers or refunds these amounts through a 'Slate Levy' added to the fuel price.

Tshifularo says because the system is premised on monthly adjustments, the intra-month hikes being reported could result in "double dipping".

"It's a gap in relation to diesel that I think needs to be looked at closely to ensure that the slate mechanism is able to deal with these kinds o...