One way to instantly cut 50 cents from petrol prices in South Africa – and 70,000 reasons why it won’t happen

The South African Reserve Bank (SARB) has published a special bulletin and economic note on petrol prices in South Africa, including several solutions to curb rising costs.One of the ways the country could achieve this is by moving to a self-service station model used globally – but the resultant loss of 70,000 jobs would push the country’s unemployment crisis even deeper.South African motorists will see a massive price hike next week, where petrol is expected to push above R24 a litre.The latest data from the CEF points to a R1.60-R1.65 hike for petrol and a R2.77-R2.85 hike for diesel.According to the SARB’s senior economists, the national government has very little wiggle room to deal with the rising prices but could review certain fees and margins to save some costs here and there.They suggested that South Africa could also update its fuel prices more frequently to avoid big shocks hitting consumers once a month.Among various suggestions, the economists noted that one of the biggest contributors to the petrol price is the retail margin, which makes up R2.42 of every litre sold.The SARB said that the retail margin is anomalous in the overall picture of fuel price hikes because this component has been increasing at a rate far higher than inflation – second only to the Road Accident Fund Levy.“The retail margin has consistently been the most significant driver of fuel price inflation outside the basic fuel price and levies. Much of this inflationary pressure began after 2015, following the implementation of a significant change in the methodology for calculating retail margins,” the economists said.Breaking the retail margin down further, however, it is clear that one component sticks out more than the others – spending on attendant wages.“Evidence from publicly released matrices shows that all components of benchmark service station costs rose by more than headline CPI between 2015 and 2020.“The greatest contributors to underlying cost increases appear to be wages and earnings for owners, with attendant wages growing particularly fast during this time, while basic capital expenditure costs like buildings, land and equipment also continue to rise.”The SARB noted that much of the wage growth appears to result from the increasing number of retail employees, with little associated growth in sales. Over the period, forecourt employee numbers grew by 19%, and cashier numbers grew by 52%, while sales volumes remained mostly stagnant.“This appears to indicate either that employment is growing per service station or that the number of low-volume stations expanded over the period,” the economists said.The SARB said that this wage growth is unusual in a global context because most markets have self-pumping petrol stations.With attendant wages accounting for 23% of the retail margin (approximately 50 cents per litre), the bank’s economists said that there is no doubt that switching to a self-service model would meaningfully reduce the petrol price.However, this is unlikely to ever happen.“(This strategy) would come at a steep social cost,” the economists said.“As of 2022, more than 70,000 people were employed as forecourt attendants – an already substantial decline from pre-Covid employment of 108,000.“The sector is a key employer of those with less formal education; forecourt attendant is the 20th largest formal sector job for those without secondary education.“With employment in retail petroleum sales already declining, the loss of margins for retail wages would risk triggering further job losses in the sector,” they said.Instead, the economists said that attention should be given to the other major component of the retail margin: owner earnings.Currently, owners benefit from two sets of costs: owner remuneration (as part of the operating expenditure) and entrepreneurial compensation. This is akin to the owner receiving a wage and a dividend.Combined, owners take away a share of earnings around the same as attendant wages – around 21% (also about 50 cents per litre).The SARB economists said that owners need to be fairly compensated and incentivised to invest in the sector – and conceded that there are few international benchmarks to test whether owner earnings in South Africa are at appropriate levels. However, they said that these should be reviewed.“Evidence from most markets indicates that owners make more on retail sales at petrol stations than on the sale of petrol. It appears that the retail margin may assume owners generate all revenue from the sale of petrol, which would suggest the margin is excessive,” they said.The SARB added that there is a deep transparency problem with the retail methodology and a lack of evidence to back up the margins. It said that the government needs to take a more rigorous approach to calculating these margins if it hopes to find any room to cut prices.