Columnists Features

Why fuel pump prices differ

MUSONDA

Analysis: FRAZER MUSONDA
IN December 2014, a famous Zambian musician posted on social media his dismay at the difference in petrol/ diesel pump prices between Zambia and a neighbouring country where he was on holiday. He bought 40 litres of fuel at K168 equivalent. His followers were equally shocked. “Someone is ripping us off,” wrote one. “Mu Zed, it’s 16 litres,” wrote another.
The pump price for diesel and petrol in Zambia at that time was at K7.566 per litre and K8.155 per litre, respectively. This translates into a price difference of slightly over K158 for the 40 litres or K3.96 per litre, assuming he bought petrol. The implication is that during that time, we were paying 49 percent more on petrol than what our friends were in that neighbouring country.
Zambians have lately taken keen interest in the pump price of petrol/ diesel relative to other countries in the region as can be attested to by such debates on social media. The debates have, however, lacked the details that can give people informed truths about such discrepancies.
In this article, I will highlight the differences in the petroleum value chains for selected countries in order to offer a glimpse of the reasons behind the differences.
Zambia has relatively high pump prices in the region because of higher costs along its petroleum value chain. These are mainly the cost of procuring and transporting spiked oil from the Middle East to the port in Tanzania, which accounts for 40 percent of the pump price and Government taxes, which stand at 32 percent. The high landed cost stems from the limitation posed by Indeni Oil Refinery.
Natural yields of diesel and petrol in most crude oils are low, compared to the heavy fractions. The market demand of petroleum products in Zambia has shifted over the years from more of fuel oil in the 80s to more of diesel and petrol lately. This, with a topping refinery that we have, entails sourcing for crude that is commingled with refined diesel and petrol, which we later refine downstream in our petroleum value chain. Zambia as a result pays a higher price on crude than what prevails at the international markets.
South Africa has pump prices lower than Zambia. It has access to the coast and thus has low landed costs for crude oil. It has the lowest costs in terms of taxes in the region after Botswana and benefits from economies of scale as a consequence of having refining capacity of 485,300 barrels per day.
Data monitored by the IMF in March 2015 revealed that the cost premium for petrol of US$0.45 was as a result of US$0.20 per litre additional cost on wholesale fuel and US$0.27 per litre higher taxes. Diesel had an additional cost of US$0.37 per litre reflecting an extra cost of US$0.22 per litre on wholesale price, a retail margin difference of US$0.18 per litre and additional tax of US$0.11 per litre.
Botswana, on the other hand, wholly imports refined products from South Africa. Despite it being landlocked, Botswana has low landed costs because of its proximity to South Africa, its source of relatively low-cost refined products. Transportation is 45 percent by rail and 55 percent by road. Notwithstanding importing refined products from South Africa, Botswana has lower pump prices for both diesel and petrol relative to South Africa. This is because of government subsidies on petroleum products in Botswana and the pula that is stronger than the South African rand.
Despite having access to the coast, Tanzania does not enjoy the benefits of cheap landed costs of crude because it wholly imports refined products instead. Its landed cost is higher than South Africa because the petroleum products are imported by road. The high cost of delivery of petroleum products, coupled with high taxes, makes Tanzania’s pump price of fuel relatively high in the region. Importers pay 55 percent of the free on board (FOB) price in addition to other levies, energy and road tolls, windfall profit and import and excise duty.
Malawi is landlocked and has no refinery. It wholly imports refined products via Tanzania, Zambia and South Africa. Government taxes and the landed cost of petroleum products is higher than South Africa. The high taxes coupled with the high landed costs and poor state of distribution infrastructure are the major factors that contribute to the high pump price in Malawi.
In view of the foregoing, pump prices will always be different in countries because of factors such as geographical location of a particular country (whether landlocked or has a coast), whether the country produces its own crude oil, whether there is a domestic refinery, the country’ fiscal policy or whether there are fuel subsidies in place.
The author is an energy engineering graduate from Linköping University and an energy markets analyst.

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