Case Study: Petrol price regulation in South Africa

In South Africa, government has intervened in and/or regulated markets involved in the manufacture, distribution, and retailing of liquid fuels in various ways since the 1930s without providing formal reasons for doing so. By 1998, the White Paper on Energy Policy referred to 'a labyrinthine set of regulatory controls' (RSA 1998: 5). While the instruments used have changed over time, the evidence suggests that the primary reason for market interventions has been to support investors in various parts of the value chain. This has been achieved by limiting competition. To a lesser extent, there has been a wish to protect motorists from excessive pricing. In addition, over time social policy objectives have become entangled in petrol price regulation. These relate to the promotion of small businesses and job creation. More recently, Black economic empowerment has been added to the list.

This mixture of reasons has made it difficult for government to implement its policy of deregulation. Petrol was the most important liquid fuel in South Africa for many years. Interventions in the petrol market have had knock-on implications for the prices of diesel, illuminating paraffin, and liquefied petroleum gas (LPG) and their control or regulation. Petrol price control or regulation has been intimately bound up with the structure of the industry and in particular the proliferation of retail outlets, or what are colloquially known as 'service stations' despite the fact that they ceased to be places where motor vehicles were serviced many years ago.

The number of service stations and their size have implications for employment in the sector, a sensitive topic in South Africa due the enduring high levels of unemployment. In the South African downstream petroleum sector, there are elements of the value chain that have natural monopoly characteristics, such as import terminals and pipelines that warrant economic regulation, while there are others that do not, such as refineries, some storage facilities, wholesaling, and retail outlets. This mixture of characteristics contributes to the often robust debate about price deregulation in South Africa. The implications for any reform include at least the need to educate key stakeholders about the different parts of the value chain and which elements warrant regulation and which do not

Source https://www.wider.unu.edu/sites/default/files/Publications/Working-paper/PDF/wp2020-140.pdf Accessed 26/06/2021

Questions 1. With reference to text above, make an argument on the positive and negatives of price controls. In your argument, indicate what the price controls intends to achieve.

2. Do price ceilings and floors change demand or supply? Explain

3. With the aid of a fully labelled diagram, explain the welfare costs of minimum price fixing for petrol set above the equilibrium price

4. A black market can develop when the government intervenes in the price mechanism by fixing petrol prices. Identify and explain a measure that the government can use to reduce the black market from forming