Insights

How Fuel is Supplied in South Africa (and Why the Fuel Price Changes Every Month)

(Transcript)

Ever pulled up to a service station and wondered how fuel is priced??

Most people know that the petrol price changes every month and that petrol is a bit more expensive inland, than it is at the coast. Most of us also understand that diesel works in a similar way.

But how, exactly, does it all come together?

When it comes to petrol, the first thing to understand is that the price you see on the pump is made up of a number of components. When you look around the service station you will see, forecourt attendants, fuel pumps, buildings etc.

Price Component 1 is known as the Retail Margin and relates to cost recoveries for Service Station operational expenses and a built-in return on investment for equipment, buildings etc. This currently makes up around 15% of the petrol price inland.

Price Component 2 Fuel needs to be Stored and Transported before it reaches the service station. These critical areas typically makes up around 7% of the fuel price inland and around 3% of the fuel price at the coast.

Price Component 3 relates to the deemed cost of purchasing petrol internationally and shipping it to South Africa. This is also known as the Basic Fuel Price or B F P. It is this deemed price which producers aim to beat, when refining fuel locally. The Basic Fuel Price currently makes up around 35% of the petrol price inland.

The BFP is also the reason the fuel price in South Africa changes every month. The BFP, which is mostly influenced by crude oil price and rand/dollar exchange rate movements, is calculated daily and the monthly average change is built into each subsequent month’s price. By comparison, other fuel price components are reviewed mostly annually.

Price Component 4 is the Fuel Levy which is government tax and the Road Accident Fund Levy - an insurance for all road users. Together, this makes up around 40% of the petrol price.

Price Component 5 is made up of wholesaler margins, together with other smaller price components – this accounts for around 3% of the fuel price.

Diesel

Diesel pricing works in a similar way, but the diesel price at the pump is NOT regulated. This means Retailers and Wholesalers can essentially sell diesel at any price. This is why you may notice service stations in the same fuel price zones selling diesel at different prices, which of course, is not allowed for petrol.

How is all of this managed?

The petrol price in South Africa is managed through regulation that has been in place for decades, although some changes have been made through the years. It is this regulation which, that prescribes the price at which petrol is to be sold at Service Stations in the various parts of South Africa.

Here’s the critical thing you need to know….

The above components aside from taxes, are all theoretical i.e. as a consumer, you pay a “deemed cost”, which includes a certain level of margin for Retailers and Wholesalers.

This benchmarked approach, ensures that Retailers and Wholesalers, including Refiners, operate as efficiently as possible, which in turn protects the consumer.

The pricing structure also aims to ensure that companies invested in the South African petroleum value chain who operate efficiently are able to achieve fair and predictable returns. It also encourages continuous investment, which, in turn, promotes reliable fuel supply, essential for economic stability and growth.

The bottom line is that you pay for far more than you see – all of it benchmarked against international pricing trends and necessary to ensure the stability and sustainability of the South Africa’s petroleum industry and hence South Africa’s economy.