How do petrol prices respond to variations in crude oil and the exchange rate? Evidence from South Africa

Baneng Naape and Ndzalama C. Mathebula
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Ndzalama C. Mathebula: University of Johannesburg, Johannesburg, South Africa

Journal of New Economy, 2022, vol. 23, issue 3, 23-42

Abstract: Energy resources are a significant production input due to being at the bottom of supply chains. The study investigates the response of petrol prices to variations in the domestic and international components. Methodologically, the research rests on the neoclassical economics. Monthly time series data of the South African Department of Energy and Mineral Resources spanning from 2002 to 2021 is analysed by means of econometric modelling, including unit root analysis, structural vector autoregression, impulse response and variance decomposition. The impulse response function indicates that basic petrol prices respond positively to their own shocks and to shocks in Brent crude oil prices and this response is substantial in size. On the contrary, basic petrol prices respond negatively to shocks in exchange rates, albeit the response is small in size. The variance decomposition reveals that variations in basic petrol prices are largely explained by their own shocks in the short run and by shocks in Brent crude oil prices in the long run. Domestically, petrol pump prices respond positively to shocks in basic petrol prices, inland transport costs, wholesale and retail margins while their response is negative towards shocks in the Road Accident Fund levy and muted towards shocks in fuel taxes. Given the rise in global crude oil prices due to geopolitical woes and their considerable share in the overall domestic petrol pump price as shown in the study, the government should consider implementing price-based policies such as indirect subsidies through the reduction of taxes and levies on petroleum products, and targeted income subsidies to provide the muchneeded financial relief to households and businesses. In addition, it can focus on reducing the reliance on oil through energy efficiency improvement and diversification into non-petroleum sources of energy.

Keywords: petrol prices; exchange rates; crude oil; pricing; South Africa (search for similar items in EconPapers)
JEL-codes: B22 B27 C13 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:url:izvest:v:23:y:2022:i:3:p:23-42

DOI: 10.29141/2658-5081-2022-23-3-2

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