How many Sasol shares would keep one in petrol forever? – 16 March 2022

Sasol Limited was the first fuel producer to be listed on the JSE, in 1979.

Subsequently, generations of young analysts have calculated how many Sasol shares were needed for the after-tax dividend to cover both the financing cost and keeping the average road user in petrol for the rest of their life. Considering all the variables – e.g. oil price, rand/dollar exchange rate, refinery yield, distance travelled per year, likely fuel consumption rate etc. – the answer in 1987 was 10 700 shares, which would have cost R101 650 (excluding transaction cost). In 1987, one could buy a reasonable family house for R100 000. The loan taken out to buy the shares would have been paid off in 28 years by December 2015 (at the prime overdraft interest rate over time, and an amount not exceeding one’s average spend on fuel per year).

With the volatility of the oil price as a result of the Russia- Ukraine war, the question is how it will impact the petrol price at the pump. If the oil price rises to US$200 a barrel, what would the impact be on the petrol price? And how does the exchange rate influence the petrol price?

The petrol price at the pump is the sum of the Basic Fuel Price (in-bond landed cost of oil converted to product), various taxes and levies (e.g. fuel tax, customs & excise duties, Road Accident Fund levy etc.) and value-added costs (wholesale margin, retail margin, the cost of transport and the pipeline etc.). There is also a difference between petrol prices at the coast and inland regions, with stepped increases the further one moves inland. For purposes of this document, the petrol price referenced is the highest octane (95) in Gauteng.

The structure of the petrol price is shown in figures 1 and 2. Over the last decade, the Basic Fuel Price (in-bond landed cost of oil, rand/dollar exchange rate and refinery efficiencies) has represented approximately 47.5% of the petrol price at the pump.

Extreme predictions often make for good reading in the press. Our analysis shows that if the oil price increases to the extreme level of US$200 per barrel and the rand/dollar exchange rate remains at below R16, the petrol price could rise to as high as R33 per litre.

However, should the oil price rise as sharply, one should factor in that alternative sources of production (e.g. fracking and shale gas) will be added to existing sources of supply. This could put the brakes on a runaway oil price.

We recognise that the oil price is likely to continue increasing while the Russia-Ukraine war continues, but considering everything we know today, it is more probable that the petrol price may increase to R26 per litre as opposed to R33 per litre.

The impact of a fast-rising petrol price will be super-inflationary, it will impede economic growth, and may put the Minister of Finance’s recent projections in the National Budget presented to Parliament at risk.

Trustees, management committees and members should note that the rising oil price might upset short-term economic developments and expectations for investment returns.

Figure 1: Structure of the petrol price in cents

Figure 2: Structure of the petrol price in %

Figure 3 : Simeka’s sensitivity analysis of the petrol price in 2022

Disclaimer

This document was compiled from information gathered from the Department of Mineral Resources and Energy, IRESS and Simeka Consultants and Actuaries