The likely impact of reduced fuel prices

The recent reduction of fuel prices by the Zimbabwean Government is expected to bring relief to both the consumer and the national economy should retailers maintain the prices at the current levels. Zimbabwe relies on imports and fuel prices are determined through a Government-approved model that takes into cognisance various cost elements with wholesalers and retailers alike restricted to pegging their prices at a margin of not more than 7 percent.
But the local oil companies have been overcharging petroleum products despite glaring price changes on the global market.
This is why Government recently revised the country’s fuel pricing model to place it on the same level with regional standards and halt gross overcharging of petroleum products by these unscrupulous dealers.
This has seen the price of petrol falling to between $1,22 and $1,33 per litre, while diesel is costing between $1,07 and $1,18 per litre.
This was from prices as high as $1,56 for petrol and $1,36 for diesel.
According to Statutory Instrument 100 of 2015 titled “Petroleum (Fuels Pricing) (Amendment) Regulations 2015 (No. 2)”, applicable profit margins for fuel wholesale and retail are now $0,06 per litre, instead of the current 7 percent, which unnecessarily varies margins for operators when external factors change.
Since last year, global oil prices have been taking a nosedive due to excess supply on the world market.
In less than a year, crude oil prices have fallen from $90 per barrel to as low as $45,23 on Tuesday.
So what effect will the price reduction have?
At consumer level, it is anticipated that the consumers will have increased real disposable incomes and then spend more. However, to some individuals, the change may not be significant especially to those that use public transport and if their cost of traveling does not change then the effect is not felt.
Generally, the cost of some goods should also decline since the cost of production would have gone down. Extra cash in the pocket may increase demand and to some extent induce some inflation that the country needs.
But for retailers, the decline in prices may only come if the change in fuel prices has a significant impact on their cost structure, which at face value there might be a noteworthy change.
For the energy-intensive sectors, reduced fuel prices will lead to a decline in the cost of production.
The lower cost of production may to some extent attract investment as well. However, in some instances because of uncertainty of the future, fuel prices investors may delay investment to assess the length of the decline.
However, income from the energy sector would decline and this may affect Government revenue.
The problem in the past has been the disregard of Government directives to reduce prices by fuel retailers.
Government gave the oil industry until January 14 last year to reduce fuel prices to not more than $1,20 and $1,32 for diesel and petrol respectively but most retailers reduced prices to between $1,44 and $1,49 for petrol and $1,29 and $1,33 for diesel.
Dealers said despite the drop in international oil prices, the price they acquire their product does not allow for their retail price to go to as low as $1,20 and still make profit.
Consumers expressed concern that retailers could find ways to bring prices back to the high levels.
“From history it has always been a temporary thing just to align themselves with the Government regulation. Sooner or later they will find a reason to hike the price. Normally they blame it on duty. But the reduction has made a small difference on our pockets although we are still expensive compared to our neighbours,” said Phillip Nkomo.
Kundai Zingunda said the lower prices have made a significant impact on her budget.
“There has been a noticeable difference in the amount I spend on fuel thanks to the price reduction.
“For a long time since we started using the US dollar, consumers have been at the mercy of greedy retailers who want to make a huge profit at all costs. Government should ensure that retailers who do not comply with the law are punished,” she said.
Zimbabwe’s fuel prices remain very high compared to other countries in the Southern African region.
South Africa’s fuel prices are approximately $1,19 per litre of unleaded fuel. In Zambia, unleaded fuel is currently selling for US$1,10 per litre, while in Tanzania the commodity is selling for US$1,05 per litre.
The average pump price for unleaded fuel is in South Africa is US$1,09 per litre while in Namibia petrol costs about US$1 per litre.
Botswana, like Zimbabwe does not have any petrol reserves and has to import all petroleum demand in refined form from South Africa.
However, the Botswana pula is stronger than the South African rand which allows it to contain prices.
Despite this, both petrol and fuel are heavily subsidised by the Botswana government and the price of fuel in Botswana is significantly lower than in South Africa at $1,06 per litre.
Fuel prices in both Swaziland and Lesotho are heavily subsidised by the governments and, therefore, have historically been much lower than prices in South Africa.
Zimbabwean consumers can only hope that the current prices will only go down rather than go back up should Government increase import duty on the commodity.
Zimbabwe Energy Council executive director Panganayi Sithole recently said the fact that Government had created a Statutory Instrument showed how serious it is about lower prices.

Esther Dzviti and Rumbidzayi Zinyuke

December 2015
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