South Africans should continue to tighten belts despite petrol price reprieve
Priya Naicker, Advice Manager at Old Mutual Personal Finance.
Unpacking topical issues and how they impact ordinary South Africans.
What’s in the news?
South Africans will enjoy some reprieve at filling stations when the price of fuel is lowered at midnight on Tuesday, 4 July 2017. The price of 93 octane petrol will decrease by 69c/l while the price of 95 octane petrol is set to decrease by 68c/l. Diesel will drop by 60c/l and the wholesale price of illuminating paraffin by 57c/l. The maximum retail price for LPGAS will drop by 91c/kg.
What causes the price of fuel to increase or decrease?
In South Africa, the price of fuel is set monthly by the Central Energy Fund, a state-owned entity, and is based on a number of factors. These factors include international petroleum prices, which are linked to the supply and demand of crude oil, the rand/US dollar exchange rate, and the cost of distributing petrol in South Africa, which includes the cost of getting the fuel from the oil tankers to your motor vehicle. Economists attribute the most recent petrol price drop to the strengthening of the rand and lower oil prices.
How much do South Africans spend on fuel?
According to Bloomberg, South Africans spend a hefty 6.20% of a day’s wages to afford a litre of fuel. The severity of this cost becomes clear when we compare it to our emerging market counterparts like Brazil who spend on average 4.23% of their daily wages on a litre of fuel.
How does this impact South Africans?
Variable expenses, such as the price of petrol, can make budgeting a real challenge. What’s more, petrol price fluctuations not only affect the cost of transport, they also have a knock-on effect on the cost of food and other products, and may lead to an overall rise in the cost of living when there are increases. Short term reductions are often not indicators of long term trends. To soften the financial impact, you need to factor this into your financial planning.
On a personal note…
While petrol price drops offer some financial reprieve, prepare for potential fuel fluctuations by determining how much money you currently spend on petrol, and set aside between 5 and 10 percent of this value each month as a buffer against future increases. Put the savings from petrol price drops to good use. Use them to pay extra towards loan, credit card or store account instalments; or boost your emergency fund with some additional cash. By having a budget in place, planning for potential petrol price fluctuations and also factoring in how these will affect the cost of other monthly expenses, you will be better able to withstand the impact of fuel increases and keep control of your finances.
