Petrol Prices to Rise in July | SA Fuel Outlook

Bad to worse for petrol prices in July

As deep tensions in the Middle East set in, local fuel price recoveries are suffering from the resultant surge in global oil

prices. This has pushed pricing deeper into an under-recovery compared to mid-month estimates, making a hike in prices for July more likely. Data from the Central Energy Fund (CEF) for the end of the third week in June shows petrol prices with a 35-38 cents per litre under-recovery. Diesel, meanwhile, has an even bigger deficit, currently at between 56 and 58 cents per litre. This is up significantly from mid-month estimates, where under-recoveries had not yet fully reflected the lagged impact of war erupting between Israel and Iran.

These are the projections at the end of week 3:

• Petrol 93: increase of 35 cents per litre

• Petrol 95: increase of 38 cents per litre

• Diesel 0.05% (wholesale): increase of 56 cents per litre

• Diesel 0.005% (wholesale): increase of 58 cents per litre

• Illuminating paraffin: increase of 45 cents per litre

The sharp rise in under-recoveries reflects the escalating global oil price, which has thankfully been undercut by a relatively stable rand. While the local unit has depreciated a little against a stronger dollar—following a hold on interest rates by the US Fed—the rand has held up amid global tensions. According to the Bureau for Economic Research, oil prices surged higher this week and are currently almost 20% above the price at the start of the month. Markets have been dominated by escalations in the Israel-Iran war, where, as was expected, Iran retaliated following last week’s strikes on nuclear facilities by Israel, leading to a full-blown war. “Iran directly supplies about 3 million barrels of oil to the market per day – this could, technically, easily be made up by a country like Saudi Arabia, which is still voluntarily cutting back production,” the BER said. “However, the real concern is that freight in the Strait of Hormuz gets disrupted, through which about 15% of the world’s oil and 20% of LNG travel.”

While oil continues to flow, prices to charter large oil tankers sailing through the strait have already more than doubled from last week, the BER noted, explaining the larger under-recoveries. Oil prices are currently at around $77 a barrel, up significantly from $64 a barrel at the same time in May. Bloomberg’s analysis of the market shows that oil prices have been extremely volatile, with prices swinging in a $8 range. Conditions are a risk of deteriorating further, with markets concerned over a potential strike from the US over the weekend. Bloomberg said senior American officials had been preparing for the possibility of an attack, although the situation was still evolving, according to people familiar with the matter. Rand is the saving grace All eyes are on the Middle East and where the war is heading next.

The swings in oil are contributing to a 50 to 73 cents per litre under-recovery in local fuel pricing, with the rand’s relative strength undercutting that by about 15 cents per litre. Despite the ongoing global tensions, the rand has held its ground around R18.00 to the dollar, managing to stick below this level for much of the week. The rand weakened on Thursday following the US Federal Reserve’s decision to hold interest rates, which strengthened the dollar. Economists have noted that the rand’s strength against the dollar has mainly been due to dollar weakness, rather than any inherent strength or reduction of the country’s risk premium. This is evidenced by the rand weakening against other major currencies like the pound or the Euro over the same periods. South Africa is still beset by perennial issues, such as stagnant economic growth, high levels of unemployment and achingly slow reforms to turn both around. The country is expected to post sub-1% GDP growth in 2025 following a decade of going nowhere, while government policies continue to choke businesses and deter investment, despite some bright spots. The Presidency’s Operation Vulindlela has made some remarkable progress in key areas, such as energy production, but is still lagging on critical reforms in logistics, infrastructure and crime, while adding the country’s crumbling local municipalities to the long list of problems it’s trying to solve.

Source: https://businesstech.co.za/news/energy/828812/bad-to-worse-for-petrol-prices-in-july/

Answer ALL the questions in this section

QUESTION 1     (20 Marks)

According to the Bureau for Economic Research, oil prices surged higher this week and are currently almost 20% above the price at the start of the month. Markets have been dominated by escalations in the Israel-Iran war, where, as was expected, Iran retaliated following last week’s strikes on nuclear facilities by Israel, leading to a full-blown war. Using the tools of demand and supply, analyse the determinants of changes in oil prices.

QUESTION 2       (20 Marks)

Despite the ongoing global tensions, the rand has held its ground around R18.00 to the dollar, managing to stick below this level for much of the week. Using graphical analysis, analyse the possible causes of the appreciation of the rand.

SECTIONB           [60 MARKS]

Answer ANY THREE (3) questions in this section

QUESTION 3   (20 Marks)

National Treasury in South Africa proposed a rise in Value-Added Tax (VAT) to raise revenue. However, they decided to forgo the increase following extensive consultations with political parties, and careful consideration of the recommendations of the parliamentary committees. Critically analyse the impact of a contractionary fiscal policies such as raising VAT on economic growth and development in South Africa.

QUESTION 4           (20 Marks)

The South African Reserve Bank cut the repurchase rate for the country by 25 basis points (BPS), dropping the repo rate from 7.50% to 7.25%, effectively taking the prime lending rate to the country to 10.75%, from 11%. Critically analyse the likely effects of the drop in the interest rate in the economy.

QUESTION 5      (20 Marks)

The African Growth and Opportunity Act (AGOA) plays a key role, especially for farmers who currently enjoy preferential access to United States (US) markets. However, there is uncertainty regarding its renewal when it lapses in September 2025. Critically analyse the likely effect of the trade barriers such as the non-renewal of the AGOA agreement on South Africa’s economic growth and employment.

QUESTION 6          (20 Marks)

Market concentration in an economy prevents the growth of SMMEs. Critically evaluate the barriers to entry that hinder SMME growth in a country of your choice. In your answer provide possible solutions to mitigating against the barriers.

Expert Answers on Above Economics Questions on Petrol Price Rise

Determinants of Changes in Oil Prices

An analysis of the given case study indicates that there are many factors that have contributed towards an increase in the oil prices. These factors can be attributed to supply side factors and demand side factors including higher transportation cost, rising risk level of escalation of war between Iran and Israel, and macro factors also contributed significantly towards the market equilibrium.
The geopolitical shock has increased the possibility of supply disruption, and the transportation cost also shoots up. The production policy of OPEC also has an impact on price, as the replacement of Iran oil would take time. The existing inventory of crude oil also has a direct impact on price level. The demand side factor includes the global economic activity that highly shapes the demand for oil and the price elasticity of demand, as the oil demand is price inelastic in the short run.

Causes of Rand appreciation:

The main causes of Rand appreciation are because of increasing demand for rand assets, weaker US dollar, export revenue and commodity prices, as higher commodity Exports can increase foreign earnings which in turn increases the demand for rand. In addition to this, the improved local sentiment also contributed towards the appreciation of Rand value.

Impact of raising VAT on South Africa’s growth and development

In terms of impact of raising VAT on the growth and development of South Africa, it has negative impact in the short run because the prices of goods and services increases leads to reduced consumption and lower consumptions shifts AD curve left causing slower GDP growth. It also leads to reduced business activity and high inflationary pressure. With respect to economic development, the increase in VAT prices has a regressive effect on poor households, and activities involving social welfare would also be negatively affected because of higher prices for electricity, transportation and school related goods. It also increases political and social instability risk and high cost of living can lead to protest among the public.

Disclaimer: This answer is a model for study and reference purposes only. Please do not submit it as your own work.

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