South Africans can look forward to cheaper fuel prices in the next few months but are warned that this trend will not last – so enjoy it while you can.
PwC’s latest Economic Outlook focuses on the fuel price forecast and states that fuel should, on average, cost less in Q1 2024 (January to March) than it currently does in Q4 2023 (October to December).
Based on current assumptions, fuel prices are then expected to slowly start climbing again.
“Our forecasts suggest that petrol could cost 0.6 percent more next year at an average of R23.24/litre while diesel could be 0.6 percent cheaper at R21.40/litre. This is good news relative to a consumer price inflation forecast of 5.2 percent for 2024.”
The forecast model estimates that the petrol price could decline from an average of R24.13/litre in Q4 2022 to R23.02/litre in Q1 2024 while diesel could ease from an estimated R23.72/litre to R21.21/litre. This, the report states, comes after notable declines in both product prices during November and December 2023, off the 15-month high peaks seen in October.
“Based on current assumptions, both petrol and diesel prices are expected to bottom out in Q1 2024 and then slowly increase (on average) during the remaining quarters of 2024 and into 2025.”
However, PwC does not anticipate these prices to reach the high levels seen in the current quarter – not for the next two years anyway.
Why fuel prices will go up next year
“Fuel prices are expected to edge higher next year due to a decline in global oil production that puts a floor under these prices. The US Energy Information Administration (EIA) estimates that oil production by OPEC+ members will fall by 340,000 barrels per day next year to 37.8 million barrels per day.
“On the exchange rate front, the rand is projected to continue its historical depreciating trend in 2024.”
The slow upward trend in South Africa’s fuel price forecasts reflects the negative trend in rand futures being slightly steeper compared to the decline in oil price futures, the report says.
How South Africa can cut the price of fuel
PwC explains that taxes, levies, and duties account for about half (54 percent) of fuel prices and are often talked about as a possible solution to lowering the cost of fuel. Pending an official announcement on a pricing formula review, the South African Reserve Bank (SARB) has suggested seven fuel price elements as possible areas for reform.
These actions – and their potential impacts on the fuel price – are:
1. RAF levy: Review the viability of compulsory third-party insurance as an alternative to the RAF. Potential impact – high
2. Retail margin: Consider transitioning the petrol price to a maximum price, rather than a regulated price. Potential impact – high
3. Retail margin: Review the entrepreneurial compensation and owner remuneration elements of the benchmark service station. Potential impact – medium
4. Retail margin: Update the survey underpinning the benchmark service station and/or require mandatory annual disclosure of costs and assets by service stations. Potential impact – low
5. Basic fuel price: Update the methodology for calculating insurance, coastal storage and ocean loss. Potential impact – low
6. Basic fuel price: Increase the regularity of basic fuel price updates to every two weeks. Potential impact – low
7. Transport costs: Publish and review the methodology for calculating inland transport costs. Potential impact – low
While the SARB notes the reforms that could offer the most significant benefits are a review of the RAF system and the shift to a maximum petrol price, PwC points out that these are also the “most challenging” to implement and would require “significant additional evaluation work and weighing of large, vested interests”.
However, big changes are not necessarily the only solution, as even a small adjustment in fuel prices would have a substantial impact on the economy.
“Let us consider, for example, the cost of fuel as part of wholesale and retail operations. This industry uses one billion litres of fuel per year in direct (own fleet) and indirect (transport service providers) logistics to distribute goods across the country.
“Reducing taxes on diesel by just R0.10/litre would reduce this transport cost by more than R100m. This magnitude of potential savings represents a substantial amount for South African households: if passed on to the consumer it could, for instance, fund the purchasing of 400,000 pairs of school shoes.”
* PwC’s price forecasts are based on the Gauteng prices of 95 unleaded petrol – which most people use for personal transport, and 500ppm sulphur diesel which is the main fuel for truck transport.