How to reduce the fuel price and grow the economy

The consequence of continuous hikes in the fuel price is what economists call cost-push inflation. Wages are undermined. Workers burdened by debt and large numbers of unemployed dependents they support will be forced to strike to keep body and soul together. This will further undermine productivity and weaken South Africa’s economic outlook. It will weaken job creation and generally contribute to a downward spiral. It’s bad news.

South Africa needs to think much more seriously about getting off fossil fuel. But this will take time. In the meanwhile, what can be done to stop oil prices derailing economic growth and job creation?

The answer lies with SASOL. South Africa refines about 500,000 barrels of oil per year through four refineries owned by Chevron, Shell & BP, SASOL/TOTAL and Engen. SASOL on its own produces another 150,000 barrels from coal and 45,000 barrels from gas processed by PetroSA, a state owned enterprise. Oil from coal is known as “synfuel”, for synthetic fuel. But it works exactly the same in your vehicle.

How does this help the diesel, petrol and paraffin price in South Africa? The four big refineries import crude oil in huge ships mainly from the Gulf and Nigeria. We pay the ruling international price, currently nearly US$110 per barrel. In addition we have to pay in dollars, so when the rand is weak, the cost goes up. This is what is driving the higher price we pay at the pumps now.

But SASOL’s oil from coal, which is nearly 33% of South Africa’s total requirement, is made from local cheap coal paid for in rands. It costs SASOL no more than US$40 per barrel to produce this oil, including allowing for overheads.

And here is the madness: SASOL is allowed to sell this oil at the same price as the imported stuff that is paid for in dollars! Why?

There is no reason other than that powerful forces, including the state which still owns 23% of SASOL, are reaping the profits, regardless of what South Africa needs. Selling South Africans our own cheap fuel from coal at the same price as expensive imported fuel has resulted in SASOL being hugely profitable. In 2012 SASOL’s earnings jumped 81%. SASOL made R20.5 billion profit in just six months last year. A deal needs to be reached with SASOL whereby its output can be blended with the imported product equally between all the refineries and this cheap oil subsidy be used to stabilise and subsidise the fuel price and hopefully reduce it. This would have enormous benefits for South Africa’s global competitiveness, reduce cost-push inflation and contribute to overall growth in the economy.

Increasingly people are realising that our natural resources, such as coal (and iron ore) are not being used to support South Africa’s comparative advantage, yet we are expected to compete with other countries. In the past I used to think that nationalisation of SASOL might be a good idea. But reading the comments in the financial press I saw a good suggestion. Let the state go into a partnership with SASOL, increase its stake by making a large investment, probably for SASOL 4, another oil from coal facility (and let’s use the latest emissions control technology on it), in return for a deal on national procurement of SASOL’s entire synfuel output at a fixed price. It is not necessary to nationalise SASOL. Just force it into a deal with the state as an investor, creating jobs, reducing the fuel price and supporting competitiveness of South African industry.

SASOL has a long history of being helped by the state. It got a deal to get it off the ground in the first place in the 1950s and to build new plants in the 1970s until it became a public company in 1979. Nationalisation is not a good idea because that has been shown under our present political arrangements to lead to weak management and poor decision making. But something has to be done that will fundamentally improve the competitive position of South Africa and take out the inflationary effects of endless fuel price hikes. The answer lies with SASOL.

Jack Lewis has a PhD in political economy. He is the former director of Community Media Trust, one of GroundUp’s two publishers, and he currently farms in the Karoo.