Costs determining the Diesel prices…
The price increase last night and the ever- changing fluctuations of Diesel got me questioning how the costs are determined of Diesel prices as the effects on the fruit production and logistics are astronomical.
According to an in-depth article in the SA Fruit Journal on the Analysis of the costs determining the price of Diesel (0.05% Sulphur), there are two main components that determine the price of Diesel fuel. 1. A set of fixed costs and 2. A set of variable costs also referred to as the Basic Diesel Price.
The composition cost (fixed costs) is a fairly comprehensive set of costs which are largely made up of the wholesale margin, service cost recoveries (storage, handling and delivery costs), reef transportation costs, customs duty and various levies such as the general fuel levy, road accident fund levy, pipeline levy and the slate levy. Since 2009 the composition cost of diesel fuel has increased from R2.74 per litre in April 2009 to R5.28 per litre in April 2015, an increase of R2.54 per litre (+93%). The main contributing factors adding to this increase is the general fuel levy which has increased by R1.05 per litre (+78%), the road accident fund levy which has increased by R0.90 per litre (+141%), the service cost recovery levy which has increased by R0.21 per litre (+216%), the wholesale margin which has increased by R0.20 per litre (+45%), and the reef transportation cost which has increased by R0.20 per litre (+129%). The composition cost of fuel is determined annually within the financial period April to March, there is however a slate levy which is added from time to time and is determined on a month by month basis.
The Basic Diesel Price component is largely determined to be the average purchase price of Crude oil, the average shipping and importation cost of Crude oil and the average shipping and importation cost of supplementary diesel purchases. Notwithstanding the shipping and importation cost, the purchase price of Crude Oil in rand value seems to be the main contributor determining the basic diesel price. The oil price has moved quite aggressively over the past few years moving from USD46.50 per barrel in April 2009 to USD125.00 per barrel in April 2012 and down again to USD56.11 per barrel in April 2015. The ZAR/USD exchange rate has declined progressively since July 2011 thus negatively affecting the recent slump in the price of Crude oil. The rand purchase price of Crude oil has therefore not decreased proportionately in line with the recent decrease in the oil price in USD terms. In summary the wholesale price of Diesel fuel is determined by the composition of costs and the in-bond landed cost of Brent crude, or in other words the basic diesel price. The composition of costs has increased by R2.54 per litre since 2009. Due to the weakening of the ZAR/USD exchange rate the rand value of Brent crude has increased by R120 per barrel at the current ZAR/USD exchange rate (which at an exchange rate of ZAR10.00/USD would be at R590 per barrel in April 2015 against R710). The basic diesel price should be at a level R1.45 per litre lower than the present level of R5.95. Therefore in theory the price of wholesale Diesel (0.05% sulphur) should be at a level roughly R4.00 per litre lower than the present level when omitting the inflationary cost escalation from 2009. It must be noted that the wholesale price of Diesel fuel is regulated but the retail price is unregulated; therefore there will be a variation in the price of Diesel at the various pump stations and from various suppliers of Diesel in bulk.
The first impact of the above increases reflects on the role of transportation of goods. South Africa is a large country and highly dependent on the transportation of goods by road. More specifically data shows that 98% of all FMCG are transported via road.
The chain effect from farm to fork is highly affected by fuel price increases. From the machinery to prepare land for production, to harvesting of produce, to road transportation from the farm to local markets or the ports of loading and essentially the shipping of the produce to overseas markets.
It is obvious why food price increases are taking place and after this analysis it is easier to understand the composition of costs determining the Diesel prices. It is unfortunate that these massive increases are taking place and initially causing food fluctuations, making the small businesses that can’t keep up with retail bulk prices and the poor people of South Africa (who statistically spend 80% of their income on food) suffer the most.
New petrol prices for October 2015
