Address by Minister of Energy Hon. J. Radebe on he debate on increasing fuel prices, 12 September 2018

Speaking notes for Minister of Energy Hon. Jeff Radebe, MP Debate on increasing fuel prices, 12 September 2018

Honourable Speaker
Honourable Members

Allow me to thank you for the opportunity to address the National Assembly on the topic of Fuel Prices. It is a fact that South African fuel prices have reached the highest levels ever. The current price levels are of great concern to the Government mainly because as fuel prices increase they reduce households' disposable income, which has a multiplier cost impact on the economy. This is due to the need for each and every consumable product to be conveyed by the various modes of transport.

Government, Labour, Business, Civil Society Organisations and the general populace are at one in expressing concerns on the negative impact of these prices on the economy. I expressed the same concerns at the conference on Africa Oil and Power last week, which was attended by the Secretary-General of the Organisation of Petroleum Exporting Countries (OPEC).

I voiced these concerns because to a large degree, OPEC is the reason why we have seen the price spike in the last few months. At the end of this Debate, I trust that Honourable Members will realise that resolving this challenge is not a quick fix and that it requires a multi-dimensional policy effort.

Honourable Speaker

The main contributors to the increasing levels of South African fuel prices are international factors, namely (i) the levels of international crude oil prices; (ii) the levels of international refined petroleum products and (iii) the levels of the Rand/US Dollar exchange rate. These factors are influenced by international events beyond what is happening within our borders.

There have also been increases in the Fuel as well as Road Accident Fund levies in the Budget tabled by the Minister of Finance and approved by the Honourable Members of Parliament in support of government's revenue generation efforts.

South Africa has a well-developed petroleum sector which, in the main, is run by the private sector. The petroleum sector employs over 100000 workers, most of whom are in the retail sector.

To manufacture these petroleum products, South Africa has a well-established crude oil and synthetic fuels refining industry of 718,000 barrels per day. It also has importation facilities, transport infrastructure and retail sector through which fuel is brought to each and every corner of our country.

The reality which we must internalise is that South Africa currently does not have proven crude oil reserves and as a result, we are heavily dependent on the importation of crude oil for about 80% of South Africa's fuel demand. The other approximately 20% is contributed to by the synthetic fuels industry at the Coal-to-Liquid facility owned by Sasol and the Gas-to-Liquid facility owned by PetroSA.

In 2017, South Africa imported over 90% of its total crude oil requirements 50% from Saudi Arabia, 24% from Nigeria and 20% from Angola. Smaller quantities were also imported from other countries to meet the crude oil requirements suitable for the South African refinery needs. What is a significant and positive development is that African countries contribute almost half of the crude oil consumed in our country.

The importation is mainly done by the owners of Crude oil refineries namely Shell, BP, Engen, Total, Chevron and Sasol. I thought that this background is necessary before I go into detail on the challenges and solutions to the current situation.

In November 2016, the Organization of Petroleum Exporting Countries (OPEC) concluded an agreement to support a high crude oil price. It should be noted that between 2014 and January 2016, the Crude oil price had collapsed by more than 80 US Dollars. OPEC intervened by removing 2% of global crude oil production. The Crude oil Price then rose from the 30 US Dollars in January 2016 to the current price averaging 73 US Dollars.

In addition, the US policy towards the Islamic Republic of Iran is now threatening to remove an additional 2% of global oil production when the US unilateral sanctions on crude oil exports from Iran resume in November 2018. Just two days ago, Bloomberg reported that South Korea had reduced their imports from Iran to zero as a result of the imminent US sanctions.

Another factor that contributes to the high fuel prices is the ongoing internal strife in Venezuela, which has reduced oil production in that country by more than 50%. Venezuela is also under some US financial sanctions, which, amongst others, makes it difficult for them to reinvest in oil producing equipment.

The less talked about cause of the high crude oil price is the instability in crude oil production that followed the regime change in Libya in 2011. There has also been an increase in crude oil demand due to world-wide economic recovery under conditions where OPEC had curtailed production.

The higher demand for crude oil under conditions of constrained supply has an increasing impact on the levels of international crude oil prices.

Added to all of these factors is the Rand/Dollar Exchange rate which has weakened severely. Oil and Petroleum products are purchased in foreign currency. The recent challenges in Turkey and Argentina have had a negative impact on the exchange rates of emerging market currencies including South Africa. Since the 7th of August 2018, the Rand has depreciated to the US Dollar, culminating in a very negative impact on future Basic Fuel Prices. I need to caution that as a result of the weakened exchange rate in the last few weeks, the outlook for fuel prices in October is of major concern.

I must however, indicate that South Africa is not alone in facing these high fuel prices. Even oil producing countries have had to endure higher fuel prices since the beginning of the year. Brazil and India are amongst the countries where fuel prices have also hit record highs on a regular basis. In the last few days as Minister of Energy, I have had to intervene to cushion the petroleum consumers from yet another fuel increase brought about by higher crude oil prices and weakening emerging market currencies. The petrol prices in our country have risen by R1.50 in a period of just 5 months. In September we were faced with another 27 cents increase, hence the intervention.

I must reiterate that the once-off intervention that we made will not have any impact or recourse to the National Fiscus.

What is to be done?

It is clear from the utterances by Senior OPEC leaders that the price of Crude oil will remain at current levels. The Secretary-General of OPEC reiterated the OPEC stance during his address to the Africa Oil and Power conference last week. As OPEC, they are pleased with the level where crude oil prices are and would ideally want to maintain prices above 70 US Dollars per barrel.

South Africans will be in a better position when we are able to produce our own oil and indeed gas. An economy of our size cannot continue to operate without significant investment in oil and gas. Time has come for us to remove any regulatory impediments to exploration. Linked to this is the need to urgently unlock the potential for shale gas in our country. This has been years in the making and the regulatory uncertainty meant investors could not make decisions. We should therefore be accelerating efforts aimed at the exploration of our country for oil and gas. Licensing must be seamless and efficient with decisions taken timeously. I am firmly of the view that going forward the Energy Portfolio should be responsible for Oil and Gas Exploration Legal framework to better align it with energy policy.

Secondly, taking into account the current reality of unproven reserves in our country, we need to look at more prolific countries and invest in blocks producing crude oil particularly on the African continent. This will require financial resources as exploration is quite a costly but necessary exercise. I have begun a process of engaging with my counterparts in Nigeria, South Sudan and Equatorial Guinea as part of our intervention to mitigate future challenges.

As a medium term intervention, we are of the firm view that apart from upgrading existing refineries, there is also a need for a world-scale crude oil refinery in which the State has a stake. In this regard, following the State visit of President Cyril Ramaphosa to Saudi Arabia, I am in discussions with my counterpart about the possibility of the two governments co-investing in a refinery. Such an investment will bring with it competitive crude oil pricing as Saudi Arabia is a significant crude oil producer.

A Task Team consisting of officials from the Department of Energy and National Treasury is also looking at medium to long term interventions on the fuel pricing framework. The team is focusing, amongst others, on the review of elements of the current Basic Fuel Pricing system.

Their work is complemented by technical experts from the National Energy Regulator of South Africa (NERSA) as well as the South African Revenue Services (SARS). The team is expected to report on progress at the end of September.

There have been calls for deregulation of the fuel prices in the country. We have repeatedly indicated that 50000 jobs of fuel pump attendants could be at risk if we go this route. I will consider initiating a study in the coming year that would investigate the costs and benefits of deregulation. That deregulation model would have from the onset to prohibit self-service in order to maintain these jobs.

On the issue of the Road Accident Fund and the Fuel Levy, we must accept that the taxes on our fuel compares favourably with many of our trading partners. The percentage of tax in our fuel price is lower than almost all EU member states, including those that produce crude oil. However, I do believe that going forward the rate of increase of the fuel levy must be looked at. On the Road Accident Fund, I would advise that an overhaul of the system be considered, mainly to prevent the reported abuse by some unscrupulous Legal Practitioners. An alternative system which is linked to Vehicle Licensing may be more appropriate.

I Thank You.