Monday, November 14, 2011

Are you short of gas?

The State is having difficulty persuading the petroleum industry to supply sufficient LP Gas. Minister Peters would like to convert 1.5 million households to this fuel by 2016.It would make a great difference. At present, unsafe fuels cause thousands of 'shack fires' annually. tens of thousands of homes are destroyed and many lives lost.
Part of the problem is the R8.15/kg regulated price at the refinery gate. This price is too low, and the industry cannot justify expansion/ This cannot be the whole story, because the retail price in Gauteng is R21.60/kg. Where does this huge markup come from? A few years ago I studied LP Gas distribution internationally. In China, gas left the refinery at (then) $370/t and reached the streets at under $400. In Morocco, where Government has also actively encouraged LP Gas use for the poor with great success, a refinery gate price of $350/t translated into a street price of just over $400, but there was a small subsidy of about $20/t.
So there are two problems we face. The first is the ongoing desire to regulate the price of petroleum products. Government has been speaking about deregulation for years, and doing nothing. The result is that the industry has underinvested in refinery capacity, and we are having to import more and more of all fuels every year, which is inherently more expensive than producing it from imported crude oil.
The second is the distribution model for LP Gas. There is layer upon layer of handlers, each of whom takes a cut. Much of this is spuriously justified by safety concerns. The LP Gas Safety Association has done an excellent job of promoting safety, but each layer of handlers now justifies its existence (and markup) on the grounds that safety is critical. It isn't. The local safety record is no better or worse than international records.
Moreover, Government unwittingly supports the distribution model by requiring licences all along the way. You even require a licence to store a few cylinders of gas in a spaza - which you can't get because the spaza doesn't sit on an identifiable erf.
A deregulated market would see refinery gate prices rise, distribution costs fall dramatically, hundreds of jobs created in an efficient distribution chain and a consumer who was grateful to a sensible Government for getting the hell out of the way.

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