New Era Newspaper

MTC Shares 4
Icon Collap
...
Home / Opinion - Understanding the fuel pricing regime

Opinion - Understanding the fuel pricing regime

2021-09-10  Staff Reporter

Opinion - Understanding the fuel pricing regime
Top of a Page

For decades, oil prices have been the cornerstone of the global economy in that they move revenues from oil-importing countries to oil-exporting countries, dominating the OPEC-plus cartel and, ultimately, changing the terms of global trade. 

The “black stuff” has lifted nations out of poverty, but it also been responsible for a lot of geo-political tensions around the globe. Being an oil-importing developing country like Namibia means whether one travels or moves goods by road, air or rail, they will always be condemned to the cost of burning one of the major sources of energy – fuel. 

At least until the dynamics of our country’s energy-mix change fundamentally, such that we phase out the combustion engines and move to cleaner sources of energy. Sizeable volumes of our imported fuel are burnt on the road and rail by trucks, taxis, buses, trains and personal vehicles. 

It is, therefore, not surprising that any announcement of fuel price increase is frowned upon – not only because it is a cost to motorists at the pumps, but also a cost element in the prices of numerous other basic commodities that are transported on the road. Moreover, fuel is an industrial input used to produce various economic outputs – and as such, fuel-price hike is an additional cost to businesses in many sectors of our economy. 

Consumers have long understood the impact of any fuel-price hike on their cost of living. What they haven’t, however, properly understood are the guiding tools government uses to determine whether or not to adjust fuel prices. 

Our local pump prices are divided in three components: the international component, which we have no control over, called the ‘Basic Fuel Price’ (BFP); our domestic levies and taxes, and inland rail and road transport cost. 

The Namibian fuel pricing regime is based on a cost-recovery principle in that whatever cost bulk oil importers incur in the process of bringing fuel to our shores should be recouped through the pump prices mechanism under the BFP model. The underlying principles for the determination of the import parity BFP are to represent a realistic, market-related cost of importing a substantial portion of our liquid fuel requirements, and it is deemed that such fuels are sourced from overseas refining centres, capable of meeting our product requirements in terms of product quality and sustained supply considerations. Our benchmark markets are Singapore (SING), the Arab Gulf (AG) States and countries along the Mediterranean (MED).  

This BFP model includes all cost elements as reviewed every 10 years in the International Commercial terms (Incoterms) of moving oil around the world. These international cost elements include spot prices of oil, shipping cost, insurance, ocean losses, product financing cost, demurrage, cargo dues, coastal storage, etc. With the exception of cargo dues and coastal storage, all other elements are in US dollar and the prevailing exchange rate applies in order to convert them to the local currency. 

A summation of those cost elements provides the aforementioned BFP or ‘landed-cost’ at the Walvis Bay harbour. To arrive at the Walvis Bay pump price, domestic levies and taxes are added, some of which are statutory, imposed by different legislations. Statutory levies include the MVA Fund levy, Road User Charge for Road Fund Administration (the biggest), Fuel Tax, National Energy Fund Equalisation Levy, and the Road Safety Council Levy. 

The non-statutory ones are the profit margins of industry players: Industry Margin (Oil Companies) and Dealer Margin (Service Station Operators). To obtain the prices of various inland towns, transport components on the rail and road are added to the Walvis Bay pump prices, and that is where the road transport subsidy from the National Energy Fund comes in. 

Currently, the Walvis Bay petrol pump price comprises 58% of the international cost elements and 42% domestic levies and taxes, while the ratio for diesel is 55% of the international cost elements to 45% of domestic levies and taxes. It would not be wrong to assume that fuel prices would be 30% cheaper if we remove some levies/taxes. 

 

The largest international cost elements (oil spot prices and freight) fluctuate every minute. However, local pump prices cannot be adjusted in such a way that they keep up with the international market. It, therefore, follows that the pricing of fuel in Namibia is backdated in that the adjustment is based on the cost of the previous month, which is referred to as ‘M-1’. To determine how much the fuel pump prices should be adjusted in practical terms (decrease or increase), you sum up the international cost elements for that particular month, add domestic levies and taxes, and subtract it from the prevailing Walvis Bay pump prices. 

That gives the difference between the market price and the locally regulated price. If the difference is negative, we call it an ‘under-recovery’, and it means that fuel costed more for oil companies to import the previous month, and there is a need to increase the regulated price and equalise it with the market price. 

The opposite is referred to as an “over-recovery”, and it means fuel costed less to import the previous month, and the regulated price should decrease and give consumers some relief. 

The minister of mines and energy has the statutory power to prescribe the price at which fuel is sold. Sometimes, the minister can decide to keep fuel prices unchanged – even if the industry is under-recovering the incurred cost through the pump prices. In that case, the National Energy Fund has to pay the oil companies the full cost incurred, using the money collected through the Equalisation Levy. This levy is meant to, amongst other things, equalise the locally regulated pump prices with the international market prices. 

The equalisation levy is also used to subsidise the pump prices of far-outlying areas. These are towns and villages that are far from the railheads, and citizens residing there would otherwise pay high fuel prices due to the road transport cost of fuel to those areas. To put this in context, motorists in Rundu and Katima Mulilo, for instance, pay the same fuel pump prices as those in Grootfontein, despite the difference in distances. This is because the last railhead to transport fuel to those areas is in Grootfontein. 

To get fuel to Rundu and Katima, one must use trucks, which is an expensive mode of transport to deliver fuel, compared to fuel rail tankers. The government, therefore, subsidises the road component. The same applies to the four O’regions in the north. They all have two prices, either based on the railheads in Tsumeb or Ondangwa. The lack of rail infrastructure in those areas would make fuel more expensive, compared to others. 

Those mechanisms make our fuel pump prices cheaper, compared to those of South Africa, for instance. South Africa does not have an equalisation levy that hedges local motorists from sharp increases in global oil prices. They pass every cost incurred by bulk oil importers onto the consumers. 

Our northern neighbour, Angola, has killed the fuel retailing market in Ohangwena region because of cheaper, smuggled fuel. Although most cars can run on the Angolan fuel, they are not similar to our imported fuel. 

Namibia imports premium products that are compatible with newer vehicles sold in Namibia, and also environmentally friendly in terms of the sulphur content and octane levels. 

*Petrus Nuuyoma is a pricing economist. He holds a Bachelor of Economics degree from UNAM, a Masters in Finance and Investment from the London School of Business and Finance (LSBF), UK, and a Business Management Certificate from the North-West University School of Business and Governance, SA. He writes in his personal capacity.


2021-09-10  Staff Reporter

Share on social media
Bottom of a page