International oil companies have ways of dealing with a low crude price. The recent drop is not the first time it has happened and the rapid job shedding in the North Sea oilfields is a case in point. But for their wholly-owned subsidiaries, the drop in price poses different, country-specific challenges that may require actions that management, employees, consumers and governments may not like.

In South Africa, the major oil companies are all wholly-owned subsidiaries. To remain profitable for their foreign owners, it is becoming obvious that in the interests of the country, market forces should be allowed to decide which companies survive, and that regulatory shackles be loosened, if not abolished.

The inevitable job losses are likely to be incremental since most local oil companies have been steadily shedding jobs for some time and operate with a fraction of the staff they employed a decade ago.

In an unregulated market, oil companies would be free to deliver petrol, diesel and gas to their customers at whatever price the market will bear.

Tax

Included in such a price would be the cost of delivery. The unfortunate consequences would mean motorists paying more for fuel in Aggenys than in Cape Town, and more in Gauteng than in Durban. As one wag put it, you could drive to Aggenys from Cape Town, but filling up to get back would need a bank loan, so some arrangement to even out the price would still be necessary.

Almost a century ago, the government believed it had the answer to this conundrum by controlling the fuel price and spreading transport costs. In return, oil companies accepted a limit on their profits. It was the thin end of a regulatory wedge.

Successive governments loaded the price of fuel with taxes and levies. In South Africa at one time, as much as 40 percent of the price of every litre of petrol and diesel was taxed. In other countries, notably Britain, the government’s take was and is even higher.

It was from inception a brilliant scheme and it has remained so, especially from a government point of view. It means taxing vehicle owners equally (whatever their incomes) and, since almost everything moves by truck these days, the money rolls in. These additional costs are passed on to every corner of the economy, boosting the price of goods accordingly.

With 20-20 hindsight, it would have been simpler to let the oil industry sort out the geography problem without interference, but it is too late now, the result being a fuel industry strangled by regulations. These govern the retail fuel price in every municipality and even the wholesale price at which refineries can sell petrol, diesel and liquid petroleum gas (LPG).

This cosy price control system pours cash with wonderful regularity into state coffers. The oil companies have become cheap and willing tax collectors who dutifully pay in this cash haul, regularly and on time, to the delight of the Treasury.

However, the system is not as cosy as it once was, for it rests on oil companies continuing to make profits that are sufficiently attractive to prevent them closing shop, selling up and leaving the country. Today, a low oil price means they do not have the same incentives to stay.


iol