The price of petroleum

With crude oil prices currently at their lowest point since the first quarter of 2014, we find out what influences the price that South African consumers pay at the pumps and what fleet managers can do to reduce their fuel spend.

In August the price of 50 ppm diesel was R5,72. It was R11,00 at the reef, you say? Well, you’re right … but let’s break the fuel price down so that you, the consumer, have a better idea of what you’re paying for and why.

The price of fuel at the pumps is the sum of numerous factors, including the Base Fuels Price (BFP), various transport costs, levies and taxes. According to the Department of Energy (DoE), domestic fuel prices are influenced by international crude oil prices, international supply and demand balances for petroleum products and the rand/United States (US) dollar exchange rate.

“The import parity principle is an elegant, arms-length method of BPF determination to ensure that local refineries compete with their international counterparts,” it says.

The BFP (converted from US dollars/tonne to rand/litre) is comprised of eight individual factors:

• Free-on board (FOB) values – petroleum product prices quoted on a daily basis by export-orientated refining centres in the Mediterranean, Arab Gulf States and Singapore.

• Freight – the cost to transport refined petroleum products from these centres to South African ports, based on freight rates published by London Tanker Brokers Panel, on January 1 each year, and adjusted monthly according to the Average Freight Rate Assessment – a function of risks and supply and demand of ships transporting refined petroleum products internationally.           

• Demurrage – for time spent in port. Demurrage rates are published by the World Scale Association Limited. In calculating the demurrage cost, the total demurrage time is limited to three days.

• Insurance – this is an element of
0,15 percent of the FOB value and freight, to cover insurance and other costs including letters of credit, surveyors’ and agents’ fees and laboratory costs.

• Ocean loss – a loss allowance factor of 0,3 percent to be calculated on the sum of the FOB, freight and insurance values is applicable to provide for typical uninsurable losses during transportation of fuels.

• Cargo dues (wharfage) – this cost (of utilising harbour facilities to off-load petroleum products from ships into on-shore storage facilities) is based on the tariff set by the National Ports Authority of South Africa.

• Coastal storage – this is to recover the cost of providing storage and handling facilities at coastal terminals. This element is adjusted on an annual basis by the increase in the producer price index (PPI).

• Stock financing – this cost is based on the landed cost values of refined petroleum product, 25 days of stockholding and the ruling prime interest rate less two percent.

According to the DoE, this BFP represents the realistic, market-related costs of importing a substantial portion of South Africa’s liquid fuels requirement – which totalled R5,72 this August. If we then break down the domestic influence on fuel price, for the August 50 ppm reef pump price of R11,00, we see the following:

• R2,40/l – Fuel tax: levied on petrol and diesel, the magnitude of which is determined by the minister of finance.

• R1,54/l – Road Accident Fund: the income generated from this levy is intended to compensate third-party victims of motor vehicle accidents, again determined by the minister of finance.

• R0,64/l – Wholesale margin: a fixed maximum monetary margin calculated on an industry average basis. It is aimed at granting these marketers a benchmark return of 15 percent on depreciated book values of assets, with an allowance for additional depreciation, but before tax and payment of interest.

• R0,35/l – Inland transport costs: transport by road, rail, pipeline (or a combination thereof) from coastal refineries to inland depots.

• R0,17 – Secondary storage.

• R0,12 – Secondary distribution.

• R0,033/l – Petroleum pipelines levy: the annual budget of the Petroleum Pipelines Regulator is approved by the ministers of energy and finance.

• R0,04/l – Customs and excise: a levy collected in terms of an agreement by the Southern African Customs Union.

• R0,0001/l – IP tracer dye levy: introduced into the price of diesel to finance an illuminating paraffin tracer dye, which is added to illuminating paraffin to curtail the unlawful mixing of it with diesel.

• R0,00/l – Equalisation Fund: a fixed monetary levy mainly utilised to equalise fuel prices. The levy is currently zero.

• R0,00/l – Slate: The BFP is calculated on a daily basis and is either higher or lower than the BFP reflected in the fuel price structures at that time. If higher, an under recovery is realised, meaning consumers are paying too little for product on that day. If lower, an over recovery is realised, meaning they are paying too much.

These calculations are done for each day in the review period and an average is calculated then multiplied by the volume sold locally. The cumulative over/under recovery is recorded on a cumulative over/under recovery account, referred to as the “Slate account”. A Slate levy is applicable on fuels to finance the balance in the Slate account when the Slate is in a negative balance.

• R0,00/l – Incremental Inland Transport Cost Recovery Levy.

These considerations added together (R5,28) are then added to the BFP (R5,72) to realise a pump price of R11,00. It is these price fluctuations that are responsible for the variations in fuel prices every month.