Abstract
Energy resources are a significant production input due to being at the bottom
of supply chains. The study investigates the response of petrol prices to variations
in the domestic and international components. Methodologically, the research rests
on the neoclassical economics. Monthly time series data of the South African Department
of Energy and Mineral Resources spanning from 2002 to 2021 is analysed
by means of econometric modelling, including unit root analysis, structural vector
autoregression, impulse response and variance decomposition. The impulse response
function indicates that basic petrol prices respond positively to their own shocks and
to shocks in Brent crude oil prices and this response is substantial in size. On the
contrary, basic petrol prices respond negatively to shocks in exchange rates, albeit the
response is small in size. The variance decomposition reveals that variations in basic
petrol prices are largely explained by their own shocks in the short run and by shocks
in Brent crude oil prices in the long run. Domestically, petrol pump prices respond
positively to shocks in basic petrol prices, inland transport costs, wholesale and retail
margins while their response is negative towards shocks in the Road Accident Fund
levy and muted towards shocks in fuel taxes. Given the rise in global crude oil prices
due to geopolitical woes and their considerable share in the overall domestic petrol
pump price as shown in the study, the government should consider implementing
price-based policies such as indirect subsidies through the reduction of taxes and
levies on petroleum products, and targeted income subsidies to provide the muchneeded
financial relief to households and businesses. In addition, it can focus on reducing
the reliance on oil through energy efficiency improvement and diversification
into non-petroleum sources of energy.