While farmers will soon be able to claim a larger diesel rebate, the sharp rise in fuel costs could still hit production budgets hard, with the next fuel price adjustment expected to deliver a major shock at the pumps as escalating conflict in the Middle East drives global oil prices past $100 per barrel.
By Francois Williams, senior journalist at African Farming and Landbouweekblad
With oil prices rising sharply in response to the conflict in the Middle East, South African farmers can expect a steep increase in diesel prices in April.
Last Friday, daily fuel price figures from the Central Energy Fund showed an under-recovery of as much as R7.46 per litre on diesel with a sulphur content of 0.05%.
The under-recovery implies that a litre of diesel would cost a South African consumer R7 more than the current price if the day’s market price were applied. The price is determined by a combination of the rand-dollar exchange rate and prevailing international product prices.
At the start of March, the wholesale diesel price increased by 62c per litre to R18.53 in Gauteng, while the coastal price increased to R17.70.
The next price adjustment will take effect on 1 April, when the annual adjustment in fuel taxes will also come into effect.
This means farmers could face an even greater price shock.
The next price adjustment is based on the average over- or under-recoveries from 27 February to 26 March.
From 27 February to 6 March, the average under-recovery was already R4.91 on 0.05% diesel, and R5.02 on diesel with a 0.005% sulphur content.
With Friday’s under-recovery already at R7.46, it means the average under-recovery up to 26 March will likely be far higher than R4.91 per litre if market factors such as the exchange rate and international product prices remain stable for the rest of the review period.
In February’s budget it was announced that the general fuel levy on diesel will increase by 8c per litre, the Road Accident Fund levy by 7c, and the carbon tax on fuel by 6c. This implies diesel prices could increase by more than R5 per litre in April, rising to above R23.53 per litre, unless prevailing market factors deteriorate further and push prices even higher.
Also read: Attack on Iran already hits oil prices
Diesel Rebate Implications
The expected sharp increase also means the impact of a more generous diesel rebate will proportionally provide less of a benefit. At the current price and tax rate, taxes represent about 33% of the wholesale diesel price. If prices increase by R5 per litre in April, taxes will represent about 27% of the wholesale diesel price.
Until now, farmers could claim back a portion of the tax on 80% of their qualifying diesel consumption from the state. From 1 April, they will be able to claim this on 100% of their qualifying diesel consumption.
The portion of tax they can claim back is 40% of the general fuel levy and 100% of the Road Accident Fund levy.
From 1 April, this will amount to R3.82 per litre that can be reclaimed on qualifying diesel consumption. At current prices, this would represent about 20% of qualifying diesel spending, but if prices rise sharply by around R5 per litre in April, the amount farmers can reclaim would represent roughly 16% of their qualifying diesel spending.
Also read: More diesel relief for farmers
Brent Crude Prices Surge Above $100 Per Barrel
Brent crude oil prices rose by more than 15% on Monday to above $100 per barrel as major Middle Eastern oil producers scale back production.
This follows disruptions since the United States and Israel began attacking Iran about a week ago. Iran borders the Strait of Hormuz, a narrow sea passage between the Persian Gulf and the Gulf of Oman, through which roughly 20% of the world’s oil consumption must pass.
Analysts point out before the conflict, oil markets largely had a global oversupply, with large stockpiles built up in consumer countries. However, the latest conflict has introduced extreme uncertainty around oil supply.
The longer the disruption continues, the greater the risk Brent crude prices could rise to the February 2022 level of $122 per barrel, or even to the 2008 record high of $147 per barrel.
Also read: Diesel refunds: Compliance challenges for farmers
