The landed cost of diesel correlates well with the oil price.
The landed cost of diesel correlates well with the oil price.
For the month of February 2022, the oil price traded at $94.18/barrel on average. This led to an increase in the fuel price for March 2022. The basic fuel price rose to R11.08/L from R9.8/L in February 2022, this is the actual cost of diesel. These high prices follow shortly after the very high prices that consumers experienced in 2021 after diesel prices traded above the R20 mark. For March, Diesel's wholesale price is R19.49.Actual data for the 2019/20 season shows that fuel accounts for close to 10% of the producer’s total costs. Fuel prices increased by 40% in 2021 and total input costs (including seed, fertiliser, chemicals and fuel) increased by 50% year-on-year.
How is the fuel price determined?
The determination of the fuel price is not a concept that most South Africans are familiar with. The purchase of petroleum products on the international market at import parity and their transport are the biggest factors that make up the basic fuel price. These two factors are also very strongly influenced by the international oil price and the Rand/$ exchange rate. From the basic fuel price, taxes and levies are added by the government. Below is a breakdown of the wholesale price of Diesel 0.05% S at R19.49/litre(as recorded on March 2, 2022).
Below, the "Other" segment consists of the wholesale margin, storage and distribution, carrier margin and retail margin.
- Basic fuel price: R11.08/L (57%)
- Taxes and levies: R6.5/L (33%)
- Other: R1.91/L (10%)
Source: (Department of mineral resources and energy, 2021) and GrainSAFigure 2: Graph showing the change in the price of oil, landed cost of diesel and the wholesale price of diesel in index from February 2014 to December 2021.
Source: Graan SA/Grain SA
Figure 2 shows the price change of the oil price, basic diesel price (actual cost of diesel) and the wholesale diesel price from February 2014 to December 2021. The graph shows a clear correlation between the change in the oil price and a correlated change in the basic diesel price.
Taxes and levies:
The two largest levies are the general fuel levy and the Road Accident Fund levy (RAF).
The general fuel levy is a levy on every litre of fuel and in the 2019/20 fiscal year generated R80 billion which is equivalent to about 6% of the total national tax revenue. This levy flows into the National revenue fund. A portion of that is earmarked for distribution between South Africa's 8 Metro municipalities. In the 2019/20 fiscal year, R13.2 billion was jointly paid out to the municipalities.
The RAF or road accident fund levy currently stands at R2.18/litre and generated R41.2 billion for the 2019/20 fiscal year.
Source: Graan SA
Figure 3 shows the relationship between the movement of landed costs of diesel with the movement of levies and taxes. In the year 2000, the basic diesel cost was R3.00. Of this R3.00 only 26% was tax compared to today's 33%.
Source: (Statistics South Africa, 2021)
Figure 4 indicates the increase in the price of the basic fuel price, the general levy, the RAF levy and other contributing factors as indices. It is clear from the figure that the taxes and levies are constantly increasing strongly regardless of the basic fuel price. The RAF increased by 425% and the general fuel levy increased by 225% from January 2008. The basic fuel price increased by 119% in the same period. This means that the RAF levy increased by 258% and the General levy 90% faster than the basic fuel price.
Conclusion:
With a basic fuel price of R11,08/L and levies and taxes of R6,50/L, levies and taxes are 59% of the basic fuel price and 33% of the total cost per 1 litre of diesel.
Many individuals are under the false impression that fuel prices, regardless of tax and levy, are not adjusted correctly, this is not the truth. As seen in figure 1, there is a clear relationship between the fuel price and oil price. The big contradiction is taxes and levies and the big effect they have on the retail price and wholesale of fuel. This effect can be reduced by producers keeping accurate records of fuel consumption and reclaiming the diesel rebate for producers from SARS. The value of this rebate is R3.66/L which can be claimed back.
Post-script
South Africa is currently experiencing the highest fuel prices in history. This is not only a stone in the shoe of producers but for the entire value chain up to the end consumer. Every product must move through the value chain to reach its final form where it is finally consumed. This means that high diesel prices cause the prices of all products to rise, which in turn results in higher inflation. It is a vicious cycle with the entire value chain having to bear the burden.
Christiaan Vercueil
I grew up in Limpopo, just outside of Polokwane. My father is a potato farmer, and therefore I have always had a love for agriculture. I completed my Bcom Agribusiness management degree and afterwards my honours degree in Agricultural economics at the university of Pretoria. I have started as an intern agricultural economist at Grain SA in November 2021 and has recently been promoted to Junior economist.
