Controlling the fuel price is a recipe for disaster

24 October 2018
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The Department of Energy has indicated that it is considering setting a maximum allowable price for 93 unleaded fuel as a relief measure to soothe South Africans beleaguered by unrelenting petrol price increases over recent months. A warning though - price controls consistently lead to unintended consequences far worse than the problems they are supposed to fix in the first place.

The fuel price in South Africa is already controlled. Our fuel price differs only between the coastal and inland provinces. In other countries, you could be paying a completely different, often lower price, at every gas station you visit because they leave it to the market to determine the price of petrol, instead of leaving it to government.

Generally, government raises (and more rarely, lowers) the fuel price based on what it often errantly thinks the market wants. If, however, government goes ahead and implements a regime whereby 93 octane petrol will no longer be allowed to go beyond a certain price, it will distort the market even more than it currently is.

A price is not only a guide in measuring the value of a product, it is also a signal, arguably the most important signal in any modern economy, of the scale of demand. When a sought-after good has a low price, it is the price that indicates to consumers whether there is a big supply of that good and that they can buy it in vast quantities. When it has a high price, consumers are told that there is a limited supply, and that they should be conservative when purchasing it. This is how a market deals with resource scarcity: Comparatively scarce resources are more expensive, and comparatively abundant resources are cheaper.

As economist Ludwig von Mises wrote, “The government's interference with the price of a commodity restricts the supply available for consumption. This outcome is contrary to the intentions which motivated the price ceiling.” Von Mises concludes, “The government wanted to make it easier for people to obtain the article concerned. But its intervention results in shrinking of the supply produced and offered for sale.”

Price controls interfere in this price mechanism of the market. While we might all wish scarce goods were more affordable, the fact is that the market is warning us that if we too liberally buy that product, a shortage will result. The higher price forces us to think twice. When government as an unproductive non-economic actor steps in and artificially forces a price floor or price ceiling, the market is no longer capable of sending relevant and timely signals to consumers. Thus, when circumstances in the Middle East cause oil supplies to drop, or transportation to other regions to be more onerous, the price of fuel will be higher. With a price ceiling enforced, the fuel we have will fly out of the pumps, and, eventually, not be replaced as the cost of new supplies will not have been covered.

There is a way, however, for government to drastically reduce the fuel price without interfering in necessary market processes. Forty percent of what we currently pay for fuel has nothing to do with fuel, and everything to do with politics. The general fuel levy, ostensibly employed to maintain and build roads, and the Road Accident Fund levy, which funds a bankrupt and collapsing institution, are what makes our fuel about R6.74 more expensive than it should be. Thus, if government eliminated these levies, we could be paying R10.11 for a litre of 93 unleaded right now – no price control needed!

But, it is highly unlikely that government would eliminate these levies. It seems the onus apparently is only on us as citizens to “tighten our belts” while government continues to spend more and more of our money on an ever-growing State bureaucracy. President Cyril Ramaphosa recently went as far as to announce at the Jobs Summit that there will be no job losses in the public sector, at a time when our economy desperately needs a drastically smaller and leaner civil service.

South Africans should be careful about welcoming more government intervention in the economy when proposed interventions are in fact aimed at correcting a problem caused by other government interventions. Instead, we must insist that government remove itself from the economy. A growing, vibrant, and free economy will be the inevitable result.

Martin van Staden is Legal Researcher at the Free Market Foundation and is pursuing a Master of Laws at the University of Pretoria

 

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