South Africa: Fuel Price Increases

UNCLAS PRETORIA 004565

SIPDIS

STATE PLEASE PASS USGS
USDOC FOR 4510/ITA/MAC/AME/OA/DIEMOND

E.O. 12958: N/A
TAGS: EPET ENRG EINV EIND SF
SUBJECT: South Africa: Fuel Price Increases

REF: PRETORIA 2998

Summary
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1. (U) On October 5, the Department of Minerals and Energy
announced a 2.64% increase in the price of gasoline at retail
outlets, accompanied by larger wholesale increases for diesel
(5.9%) and kerosene (8.5%). This comes after two successive
price decreases in July and August. The current price of
gasoline is only a half a U.S. cent less than June's all time
high (reftel). Diesel and kerosene are at record highs. The
government has no plans to tap into its Fuel Equalization Fund to
smooth retail gasoline price increases as it did in June.
Analysts generally agree that South African economic growth will
not be seriously hurt as long as fuel price increases subside
during the next six to twelve months and there is no major
weakening of the rand. On October 6, Reserve Bank Governor Tito
Mboweni flatly stated that surging oil prices were an
inflationary risk and reduced the likelihood of another interest
rate cut when the Monetary Policy Committee meets on October 13
and 14. So far, the continuing strength of the rand has
protected South African consumers from the full impact of rising
world crude oil prices. End Summary.



Government Announces a Fuel Price Increase
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2. (U) On October 5, the Department of Minerals and Energy
announced a 2 U.S. cents per liter (7.6 U.S. cents per gallon)
increase in the price of gasoline, and approximately 4 U.S. cents
per liter each for diesel and kerosene (approximately 15 U.S.
cents per gallon each). These increases raised the average
retail price per liter of gasoline in Johannesburg to 73 U.S.
cents ($2.76 per gallon) and the wholesale price of diesel and
kerosene to 68 and 53 U.S. cents per liter ($2.58 and $2.00 per
gallon),respectively. Diesel prices in South Africa normally
rise between October and March because winter demand for heating
oil in the northern hemisphere drives up international prices.
This routinely poses a problem for South African farmers, who use
diesel to plough in the southern hemisphere's spring and summer.
This year, however, the increases may lead to slightly higher
food prices than otherwise would be the case.

The Fuel Equalization Fund
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3. (U) The Fuel Equalization Fund was established in the 1970's
to subsidize SASOL's synthetic fuel production when SASOL was
still a government corporation. The government imposed a 1.2
U.S. cents per liter levy on fuel sales to support the fund. The
levy was discontinued when the crude price went above $16/bbl,
and reintroduced on a sporadic basis when crude prices were
especially high. This happened twice during the Gulf war in 2002
and in June of 2004 when the government withdrew $20-25 million
to take the edge off a big price increase. Currently, the fund
has a reserve of $70-80 million, enough to subsidize fuel prices
for about four months at 2 U.S. cents per liter.
The Central Energy Fund manages the fund, but Treasury and the
Department of Minerals and Energy jointly control it.


4. (U) The South African Petroleum Industry Association, whose
membership includes refinerers and retailers, predicts another
round of fuel price increases in November. If this happens,
South African gasoline prices would reach another all-time high.
Another factor that will determine prices is the strength of the
rand. Since June, the South African rand has weakened against
the dollar some 5%; it is currently trading at around R6.5 to the
dollar.

MILOVANOVIC