Abstract
The Basic Fuel Price (BFP) mechanism is used to calculate petrol prices based on import parity pricing (IPP) framework in South Africa (SA). Its underlying principle is to reflect realistic, market-related costs of importing a significant portion of SA’s liquid fuel requirements from international refining centres that meet local product specifications.
Currently, the BFP mechanism applies a 50/50 weighting between the Mediterranean and Singapore regions. However, the recent refinery capacity rationalisation in these areas has led to the closure of several refineries, causing petrol from both regions to trade at a premium. This has made imports more expensive compared to alternative sources such as the Arab Gulf and West Coast India.
As a result, importers of petrol into SA have switched to regions which offer competitive pricing such as the Arab Gulf and West Coast India. Over the past five years, the petrol imports into SA from these latter regions account for a large share of actual imports, surpassing the imports from the Mediterranean and Singapore which have been on a declining trajectory.
This presents a challenge since the BFP price formula continues to reflect pricing from the Mediterranean and Singapore regions, which are now less relevant markets for petrol imports and not aligned to the underpinning IPP principle. Such misalignment results in inflated petrol prices and enables importers to earn arbitrage profits by selling discounted petrol imports at BFP-linked prices which then undermines the viability of the domestic refining capacity.
This research aims to demonstrate that revising the BFP formula to reflect the actual regions from which SA imports petrol could potentially reduce BFP prices by 5 to 40 cents per litre (SA cpl), benefiting motorists. However, such adjustments may have unintended consequences, including possible refinery closures and impacts on local production capacity. In order to balance the outcomes from lower petrol prices and domestic refinery sustainability, this research considers policy interventions to protect the domestic refineries and ensure security of fuel supply.