The Automobile Association of South Africa recently announced an increase in petroleum prices, citing the combination of a weaker rand and an increase in the international Brent crude oil price. This is the third consecutive increase in petroleum prices in a year. During November 2011, the price of petrol (95 unleaded) was R10.77c per litre, yet a decade later, motorists have to cough out R19.58c for a litre of petrol. Several components make up the price of petrol, including the price of Brent crude oil, the foreign exchange rate and government taxes making up approximately 40% of the total price of petrol.
Impact on Households
A general increase in petroleum prices affects households in many ways, including through an increase in food and clothing prices, public transport fares, private fuel bills, sudden change in spending habits and consequently, reduced quality of life. Most goods that are sold by retailers and wholesalers are transported from one place to another to reach the end-consumer, which in this regard, are households and micro-enterprises (i.e., spaza shops). In most cases, transport costs are factored into production costs, which inevitably increases the final prices of goods sold. It is worth noting, that even though the majority of South African households have running water and stable electricity connections, certain households, more especially lower-income earners, still consider illuminated paraffin as a source of power used for heating, lighting and cooking. This has a huge knock-on effect on their income considering that their wages and salaries barely increase to make up for these additional costs .
In addition, lower-income earners such as cashiers, cleaners, drivers and security guards, make use of public transport to and from work. An increase in the petrol price translates into an increase in taxi, bus, train and airline fares. As a result, lower-income earners are the most hit by the higher petrol price as they spend a larger portion of their income on public transport, illuminated paraffin and essential food and clothing items.
The middle- and upper-income earners also feel the burden of an increase in petrol prices. For example, the long-run effect of an increase in petrol and food prices is inflation. Typically, the regulatory (Reserve bank) response to inflation is an increase in interest rates (repo rate). Since the majority of middle-and upper-income earners utilise credit facilities such as mortgage bonds, vehicle finance, personal loans and credit cards, they bear the burden of an increase in interest rates in the long run. As such, the bulk of their disposable income would be spent on debt service costs (interest and capital payments).
Impact on Business
As noted earlier, farmers, manufactures, retailers, wholesalers and micro-enterprises involved in the production, transportation and sale of goods are mostly affected by an increase in petroleum prices. A rise in petroleum prices implies an increase in the total cost of production. More often, businesses shift these additional costs to consumers. Small businesses, however, usually struggle to absorb the overall effects of the increase in petrol prices given the sudden change in spending habits by consumers. When consumers spend a larger fraction of their income on petrol and essential food items, this leaves less room to purchase clothes, jewellery, beauty products and other luxury goods.
The airline industry is no exception. Airlines are operated by fuel and thus an increase in petroleum prices would translate into an increase in operational costs in the airline industry. These additional costs, however, are usually shifted to the consumers/passengers, both travelling for leisure and business as well as air freight services. This, although to a small extent, may discourage business conferences, meet-ups and tourism. When local citizens feel that airfares and private car rentals are too high, they become reluctant to engage in inter-provincial travel, which to some extent, may affect the travel and tourism industry. Similar to the airline industry, the eCommerce industry might experience a decline in online sales given the increased petrol price that has to be factored in delivery costs. Food delivery services like Uber Eats and Mr D Food, are no exceptions.
Individuals that make use of private vehicles to travel to and from work might switch to public transport given the savings that can be realised. This implies that they will service their private vehicles less often. This change in spending habits might have a knock-on effect on businesses involved in the service and sale of vehicle parts.
Impact on Government
When individuals travel less as a result of the increase in petrol price, the government might collect less tax revenue in terms of fuel levy. Also, as businesses struggle to absorb the effects of the increase in petrol prices and change in spending habits by individual consumers and households, certain businesses might close down while others might operate at a normal profit. This will affect the total amount of tax revenue collected by the government in respect of company tax. To some extent, higher petrol prices might induce social unrest in the form of strikes and the government would be liable for most of the property damage.
