## The Price of Fuel: How Bad Could It Get?

The cost of fuel in South Africa (and I imagine pretty much everywhere else) is a contentious topic. It varies from month to month and, although it is clearly related to the price of crude oil and the exchange rate, various other forces play an influential role.

According to the Department of Energy the majority of South Africa’s fuel is refined from imported crude oil. The rest is synthetic fuel produced locally from coal and natural gas. The largest expense for a fuel refinery is for raw materials. So little wonder that the cost of fuel should be intimately linked to the price of crude oil. The price of crude oil on the international market is quoted in US Dollars (USD) per barrel, so that the exchange rate between the South African Rand and the US Dollar (ZAR/USD) also exerts a strong influence on the South African fuel price.

I am going to adopt a simplistic model in which I’ll assume that the price of South African fuel depends on only those two factors: crude oil price and the ZAR/USD exchange rate. We’ll look at each of them individually before building the model.

## Exchange Rate

The Rand reached a weak point against the USD in January 2002 when $1 cost around R11.70. After that it recovered and was relatively strong in 2005. However, since then it has been systematically weakening (with the exception of some brief intervals of recovery). At present (end of March 2015) you will pay around R12 for$1.

I guess this is part of the reason why new running shoes are so damn expensive.

## Conclusions

These models only consider the effects of the international price of crude oil and exchange rates. Effects like the fuel price increases in March and April 2015, which were based on budgetary decisions, are of course not accounted for. Predictions should thus be treated with a healthy dose of skepticism. But as a general guide to the possible fuel prices we could expect in the future, it’s quite illuminating. And not a little bit scary.