Energy & Environment

Sunday, 24 July 2011 22:26

Fuel price update: Why diesel costs more

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Since 2007 the price of fuel in South Africa has risen significantly. With the second price increase effective as of 04 May 2011 and another on the cards next month, the ever-widening gap between the price of diesel and petrol is of concern to diesel consumers. This note sets out the reason for the widening gap between petrol and diesel prices in South Africa.
Why is Diesel so much more expensive than Petrol?

Although diesel and petrol are produced at the same refineries, they are very different products with different applications in the world economy. Typically, diesel is used in industries such as manufacturing, mining, heavy vehicle transport and as a heating fuel, although the use of diesel for private motorists is also growing. In contrast, Petrol is used primarily by private motorists.

Given their different uses, petrol and diesel have different demand patterns and therefore, different prices. In economics, price is set at the point where demand and supply meet and therefore, the higher demand for diesel has pushed up its price across the globe. It doesn't cost more to produce diesel however but if the price didn't rise there would be a shortage in the global economy.

Diesel demand and prices are rising for a number of reasons including high worldwide demand for diesel especially in Europe, China, India and the United States. At the same time, refineries are manufacturing less polluting, lower-sulfur diesel fuels and therefore the pressure on diesel prices is greater. It can be expected that the higher diesel price will eventually cause demand for diesel to slow and the substitution of petrol by diesel to cease. When this happens, we can expect the price difference between petrol and diesel to stabilise.

On the supply side, refineries have very long lead times for new investment and are unlikely to respond quickly to the widening gap between demand for petrol and diesel.

The widening gap between petrol and diesel prices is primarily a result of the global demand that has led to demand for diesel outstripping the demand for petrol. While the gap is already significant, we anticipate that it will widen further before stabilising.

Should you need additional information interview with Avhapfani on the price increase, please contact Jean Dennis.


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