Deregulation and the Petrol Price

<img src="petrol price.jpg" alt="Petrol price" width="300" height="200">

Will deregulation lead to a lower petrol price?

Every month we all wait with bated breath for the announcement on the petrol price for the next month. Will it go up again? Will be we be lucky for a while? It is not only vehicle owners that are affected by the petrol price. Everybody is affected. A higher petrol price means a rise in food prices, a rise in transport prices; in fact, a rise in everything.

It is interesting to note that the petrol industry is the only industry in South Africa that is still regulated. Many analysts believe that deregulation of the petrol industry will immediately result in a sharp drop in the petrol price. “Not a chance!” says Peter Morgan, director of the Fuel Retailers Association. Morgan points out the following interesting facts about the petrol price to support his belief.

  • It is not the petrol price that causes a rise in prices; it is the diesel price! Consumer goods are transported with diesel, not petrol. And guess what? The diesel industry has been deregulated for some time! And what happened? The price of diesel immediately went up. The same thing will happen with the petrol price, says Morgan.

  • Why will the petrol price not drop after deregulation? Morgan says the answer is very simple. A very large percentage of the petrol price is made up of the price of crude oil and an astonishing variety of taxes and levies. The retail margin on the petrol price is a mere 7.24% while the wholesale margin is only 4.79%. So it comes down to this simple fact: retailers can scarcely afford to offer a lower petrol price because they already earn a pitiful profit margin.

This may indeed be the case, argue proponents of deregulation, but industry analysts forget about the very nature of a capitalist environment where competition is fierce. Why, for example, will a large retail group not offer a lower petrol price at their own petrol stations simply to attract customers to do their shopping at their shops? Think about it for a second: if you have to spend a certain amount at a certain retailer in order to qualify for a much reduced petrol price at the petrol station of that retailer, will you not rather shop there?

Perhaps deregulation should be put back on the agenda. I think the petrol price will drop, at least at some petrol stations.