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Deregulation of the retail petrol price is the South African government’s planned policy as contained in the White Paper which sets out the roadmap for deregulation. Certain conditions would have to be met before the market is ready for this to occur. Some issues, such as protecting fuel service jobs, have been resolved through the prohibition of self-service at fuel station forecourts. But the wheels seem to be turning slowly.

So is deregulation practical?

The debate about deregulation of the petrol industry is about opening up the entire value chain, from the refinery to the pump. Proponents of deregulation expect the resultant competition to bring prices down. But is is worth questioning whether that would happen automatically. SA is not a simple market. 

Government’s energy white paper of 1998 clearly states that deregulation is at the top of the liquid fuels policy agenda, but that the transition will have to be managed carefully. There are six refineries owned by seven oil companies as set out in the table below (source SAPIA).

All the refiners are also wholesalers, but not all wholesalers are refiners, there are more than 600 wholesale licensees (though the refining wholesalers own 98% of the market).

To meet demand, SA usually imports between 10% and 20% of its refined liquid fuels through Durban, Port Elizabeth, East London, Mossel Bay or Cape Town harbours. Fuel is then transported either by truck or the pipeline from Durban to Johannesburg, which is owned by Transnet, to retailers or storage for secondary distribution. There are about 4600 service stations around the country. Approximately 50% of these are owned by the oil giants and 50% are privately owned (but more than likely still using one of the oil major’s brands). The oil companies can own, but not operate, service stations.

Everything above the basic fuel price, which is set by international markets, is regulated by government.

However, not all parts of the value chain can be easily opened up to competition. Given their high capital costs, refining and primary distribution have natural high barriers to entry. But in secondary distribution and at wholesale and retail level, the idea is that deregulation will promote competition, thereby ushering in price cuts along the value chain by getting rid of the inefficiencies in the market. 

Margins are calculated from averages. The retail margin, for example, is based on the average costs of retailers, for which an average return is calculated. But not all retailers have the same costs, and not all enjoy the same volumes. There are distortions in the market that deregulation would curb for example, retail stations on the way to Durban enjoy extremely high profits deregulation will possibly even out the playing field and allow more scope for lowering pricng. Then there are small retailers who struggle to survive and for whom deregulation may work as they can then raise prices.

Ideally there should be a differentiation at the retail level, and that those in busy areas would likely be able to cut their prices substantially. Those facing higher costs and lower volumes in the rural areas, however, would probably not. So as to whether prices would come down at the pump, would depend on the merits of each pumps situation

As it stands, using averages to allocate margins promotes inefficiency. All costs get put into one pot to get the average. But the average is not necessarily the best. There’s little incentive for someone to invest in efficiency, because in effect the given margins allow industry players to recover other players’ costs. This is a strong incentive for derugulation as it would stimulate investment in infrastructure

If all went according to plan, the opening of the market would allow smaller players to enter at both wholesale and retail level, increasing competition, and ultimately keeping prices in check.

But there is a downside to deregulation that needs to be considered. 

The small, independently owned enterprise without the price support of an oil company major, would be squeezed out of the market. With regulated industry fuel gross margins in the region of just 7%, there is precious little room for competitive pressure ,and the fuel retailer would be left with only the self-service route, which is currently illegal, in order to survive. With rent and wages being the two biggest costs to retailers (and rent being a given), these players would either have to shed a few jobs at the pumps or shut down.

In 2008, the Automobile Association (AA) came out in support of Raymond Ackerman’s calls for deregulation. Now, however, AA public affairs head Gary Ronald says the biggest issue has become employment in the industry. Ten years ago, the retail margin was 30c/l. It is now 91,8c/l. 

Though deregulation would give retailers leeway to take, say, 10c/l instead of the current 91,8c/l, the impact on jobs would be significant. The argument in favour of deregulation then quickly changes from one of pure economics to socioeconomics. There are 70000 petrol pump attendants in SA, most of whom would potentially lose their jobs.

The retail industry is already overtraded, and therefore under pressure from lower volumes and increasing costs. New applications for licences are prolific. At first glance, it seems it wouldn’t be so bad if deregulation got rid of a few retailers, given the oversupply. But the fact that the remainder of the pumps could end up in the hands of a few big players and could result in a monopoly is cause for concern.

In 2006, the department of energy went on a road show to India, Australia, New Zealand, the UK and France. The aim was to see how these countries went about deregulating their markets, and what the outcome was and the finding was that through there was an initial decrease in fuel pricing following deregulation, prices increased to previous levels over time.

SA imports 20% of its refined product. This is why the basic fuel price – an import parity price – is used at this point in the value chain. If SA refineries can’t compete at that price level, they would be internationally uncompetitive. Importing refined product to any degree then means the marginal cost of bringing the product to market is the import parity price.

As long as SA is importing refined product, the marginal cost of liquid fuels will be set by what it costs to import it. After perhaps an initial bout of price cutting and market-taking (and even investing), in the long term refineries would tend to set prices at import parity – there’s absolutely no economic reason for them not to.

At the wholesale level, most of the nonrefining wholesalers are black economic empowerment (BEE) deals that wouldn’t be economically strong enough without the protection of regulated prices. Assuming that these players get squeezed out of the market, the lack of regulation would mean carte blanche in terms of prices for transport and storage, for example.

It is unclear which of these arguments forms the crux of SA’s policy evolution. The department of energy has not abandoned plans to deregulate the market (which was meant to have been opened up 10 years after the white paper was released).

The white paper sets out a roadmap for deregulation. Certain conditions would have to be met before the market was ready. It seems the process of reaching these conditions is just slower than expected. Some of them have already been met, like protecting fuel service jobs by prohibiting self-service, or making sure there are mutually acceptable arrangements between synfuels and the other oil majors (in the past, all the other major players were forced to buy certain quotas of product from Sasol – these quotas have now disappeared).

But on the whole, the industry isn’t where it should be. Not much progress has been made on empowerment – both in terms of management ratios and new entrants to the market. Monitoring mechanisms have to be put in place to limit post-deregulation distortions (like the concentration of power and job losses).

Furthermore government must be sure of how to deal with the labour unrest that may ensue to make sure the pumps don’t run dry, as happened when strikes hit the forecourts in 2007. In essence, it’s expected that deregulation will bring about a rationalisation of the service industry, and government wants the transition to be as painless as possible. 

It’s difficult to get a clear idea of the policy driver here. The department’s view (along with the majority of the industry) seems to be that the international case studies show prices tend to end up in the same place as they were before deregulation, and that there would be fewer industry players and fewer jobs, but more efficiency in the system.The department appears to be simultaneously concerned by two aspects, which seem to contradict each other:

  • That deregulation will cause the smaller players to be squeezed out of the market and industry rationalisation will occur; and
  • The need for smaller BEE players to enter the market before deregulation.

However, deregulation is still government’s near-term policy.

It’s still to be determined whether these measures will bring any relief at the pumps, or increase efficiency in the market. In the end, these are the twin goals of deregulation and may well be achievable without it. Until then, SA will have to come to some sort of conclusion about whether deregulation will in fact achieve the price cuts it is intended to. If it won’t, it may not be worth pushing the small guy out of the market for now, along with the jobs.