If the Fuel Levies Are Cut, How Will Government Replace That Revenue?

The South African public have been listening to politicians talking about removing the tax components in order to lower the price of petrol for many years now, but nothing has really come from these not-so-bright suggestions. The only relief the public has seen was a brief reduction in the General Fuel Levy in 2022, when the Russia-Ukraine war pushed up the international oil price, which sent the Basic Fuel Price (BFP) component of our petrol price soaring.

It’s all very well to speak of a petrol price of R14 per litre, however, that would require the Minister of Finance to remove the General Fuel Levy – currently at R3.85 – and the Road Accident Fund (RAF) Levy, which stands at R2.18 per litre.

Our reality is that we have watched our petrol price fluctuate at the mercy of two main components: the international oil price which is subjected to geopolitical forces; and our rand currency exchange rate, which is influenced by our own political conduct and economic conditions.

There is of course the issue of a further R5.16 per litre in the petrol price, which is made up of 10 other components that largely cover the costs of storage, transportation and margins for the retailers and wholesalers of petrol. However, as hard as they have tried in the past, the authorities have been unable to reduce these minor levies and only managed to contain them as best they can. Fortunately, soon after Enoch Godongwana became the Minister of Finance, he realised the damaging impact of incessant increases to the General Fuel Levy and RAF Levy over the past two decades, and put a halt to these increases in 2022. Had he not done so, our petrol price would be around R1 more per litre today.

The graph shows us how the BFP component, which makes up around half (48%) of the total price of petrol over the past decade, has fluctuated largely due to changing oil prices. During the year of 2020/21 when demand dropped during the height of the Covid-19 pandemic, the average price of Brent Crude oil was around $41 per barrel. This in turn reduced our petrol price from an average of R16.16 the prior year to R14.65 per litre, despite the rand / dollar exchange rate of R16.49 /$1 on average, which was 13% up on the prior year. This gives one a clear indication of the power of international geo-political forces on our petrol price.

The graph also shows how the international oil price escalations that began in 2021/22, taking Brent Crude from $65 to $96 per barrel (average $76.38 for that year), pushed our petrol price over R20 per litre and have kept our petrol prices fluctuating on average per year above the R23 per litre mark since then.

The recent few months’ reduction in the price of petrol from a high of R25.49 in May this year to R21.05 in October has largely been due to a combined strengthening of the rand (by 6.5%) and the lower oil price (down by 17%), which has reduced the BFP component of our petrol price to below R10 per litre for the first time since February 2022.

Current tensions in the Middle East between Iran and Israel could very well reverse these gains and our petrol price could escalate back up to R23/R24 per litre levels in a short space of time.

Should government take meaningful action to remove the two biggest levies and taxes components – the General Fuel Levy and the RAF Levy, this would have a marked impact on reducing the price of petrol and diesel by around R6 per litre. However, the government would need to increase the rate of taxes in one or more areas of VAT and PAYE to make up for the R130 billion to R140 billion per annum lost to Treasury as a result of this decision. Given our current state of affairs, the only other way we could manage such a drastic reduction in taxation would be to remove the wasteful expenditure caused by maladministration and corruption throughout all levels of government, combined with trimming the fat of a bloated administration, which is hardly likely to happen in the next few years.