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Fuel price shock 'heralds a wave of inflation'
May 1, 2006
By Edwin Naidu
South Africa's consumers should prepare themselves for an increase in food and transport costs in addition to more fuel price shocks, a top economist has warned.
Dr Azar Jammine, an economist in Johannesburg, said businesses tended to pass the effects of the fuel price on to consumers, thus ensuring that inflation would rise and people would have to pay more for goods. "Prices do not come down when the price of oil drops, resulting in lower fuel costs, because so much of industry is in the hands of a few large companies," Jammine said.
The price of petrol will increase by 39c a litre on Wednesday, making the cost of a litre of fuel R6,12c.
Jammine said the global demand for oil, which saw the cost of a barrel of oil rise to $73, would remain volatile because of the heavy demand. South Africans use 4 000 barrels of oil a day compared with the 88 million barrels used by the rest of the world. Last year motorists used more than 11 billion litres of petrol, indicating that the latest increase will result in consumers forking out an additional R350 million a month for fuel from Wednesday.
Jammine said South Africans were not paying as much for fuel as Europeans were. "We should not get too afraid of paying R10 a litre for fuel … most of Europe pays as much because levies make up three-quarters of the fuel price to dissuade people from using cars and to prevent pollution."
He said, however, that South Africa was far from reaching the R10-a-litre level since the basic cost of fuel made up at least 55 percent of the total price.
"Even if the price of oil were to double from its current levels, the basic cost of fuel - currently R3,46 a litre - would go up much less," he said.
The remainder of the petrol price is made up of a fuel levy, equalisation tax, retail and wholesale markup, pipeline and Road Accident Fund levies.
Jammine said the price of a barrel of oil would have to reach $200 (about R1 200) before motorists started forking out as much as R10 a litre for petrol.
"The petrol price will go up, but to around R7,50 a litre."
Goolam Ballim, senior economist at Standard Bank, said the price of oil was likely to remain high for some time, resulting in higher fuel costs over the next few months. "When the price of oil rises the rand appreciates, but the appreciation is not so big as to make a significant difference."
The positive outlook of the rand, however, was helping to offset effects of the rise in fuel costs. "The oil price increase far exceeds gains made by the rand, so we can look forward to more fuel price increases," Ballim said.
The price of fuel would eventually reach R10 a litre because of inflation, but not in the immediate future. "It is an extreme example. We won't get there for many years."
Fuel price shock 'heralds a wave of inflation'
May 1, 2006
By Edwin Naidu
South Africa's consumers should prepare themselves for an increase in food and transport costs in addition to more fuel price shocks, a top economist has warned.
Dr Azar Jammine, an economist in Johannesburg, said businesses tended to pass the effects of the fuel price on to consumers, thus ensuring that inflation would rise and people would have to pay more for goods. "Prices do not come down when the price of oil drops, resulting in lower fuel costs, because so much of industry is in the hands of a few large companies," Jammine said.
The price of petrol will increase by 39c a litre on Wednesday, making the cost of a litre of fuel R6,12c.
Jammine said the global demand for oil, which saw the cost of a barrel of oil rise to $73, would remain volatile because of the heavy demand. South Africans use 4 000 barrels of oil a day compared with the 88 million barrels used by the rest of the world. Last year motorists used more than 11 billion litres of petrol, indicating that the latest increase will result in consumers forking out an additional R350 million a month for fuel from Wednesday.
Jammine said South Africans were not paying as much for fuel as Europeans were. "We should not get too afraid of paying R10 a litre for fuel … most of Europe pays as much because levies make up three-quarters of the fuel price to dissuade people from using cars and to prevent pollution."
He said, however, that South Africa was far from reaching the R10-a-litre level since the basic cost of fuel made up at least 55 percent of the total price.
"Even if the price of oil were to double from its current levels, the basic cost of fuel - currently R3,46 a litre - would go up much less," he said.
The remainder of the petrol price is made up of a fuel levy, equalisation tax, retail and wholesale markup, pipeline and Road Accident Fund levies.
Jammine said the price of a barrel of oil would have to reach $200 (about R1 200) before motorists started forking out as much as R10 a litre for petrol.
"The petrol price will go up, but to around R7,50 a litre."
Goolam Ballim, senior economist at Standard Bank, said the price of oil was likely to remain high for some time, resulting in higher fuel costs over the next few months. "When the price of oil rises the rand appreciates, but the appreciation is not so big as to make a significant difference."
The positive outlook of the rand, however, was helping to offset effects of the rise in fuel costs. "The oil price increase far exceeds gains made by the rand, so we can look forward to more fuel price increases," Ballim said.
The price of fuel would eventually reach R10 a litre because of inflation, but not in the immediate future. "It is an extreme example. We won't get there for many years."
