The Sunday Mail
Business Reporter
Zimbabwe is unlikely to see an immediate drop in the local currency price of fuel in line with falling global prices because current prices already reflect dynamics in source markets, while the recent sharp fall in international prices relates to purchases for future deliveries.
Instructively though, Zimbabwe’s retail fuel prices compare favourably against those prevailing in the region, including markets that have cut prices, in US dollar terms on account of declining Free on Board (FoB) prices.
The FoB costs include transportation to the port of shipment, loading the goods onto the shipping vessel, marine freight, insurance, and unloading and transport costs of the goods from the arrival port to the final destination.
In the few regional countries where the fuel pump prices have already been reduced, prolonged exchange rate stability, which Zimbabwe has been battling since 2018, has been a major factor.
Brent Crude Oil prices on the international market have dropped to a five-year low to reach US$20,37 per barrel by Wednesday, compared to US$70 by the end of last year.
Questions have arisen why Zimbabwe has not cut the retail price of fuel at a time global prices have hit record lows as demand shrunk due to the raging coronavirus pandemic and a glut in supply from major producers.
In fact, the Zimbabwe Energy Regulatory Authority (ZERA three weeks ago approved domestic fuel price hikes as global prices slumped with diesel jumping to $21,52 per litre from $18,66 and petrol increasing to $21,77 from $18,70 per litre previously.
Zimbabwe may also not see instant fall in retail fuel prices given that the biggest fall in oil prices relates to a segment of the international market, which supplies mostly the United States of America.
Zimbabwe buys most of its energy fuels from suppliers that get it from the Brent Crude market, whose prices have not fallen as much as those on the West Texas Intermediate (WTI) futures market, where the US procures its petroleums.
Notably, even then, these prices relate to off-rig prices, which exclude the cost of refining the crude oil as well as transportation to various markets until it reaches the final consumer.
If at all Zimbabwe is going to see the domestic retail price of its fuel coming down, that could only happen after a month from now, at the very least, when fuel bought on the futures market reaches “our shores”.
Secretary for Energy and Power Development Engineer Gloria Magombo said Zimbabwe was already benefiting from the low prices of fuel on the international markets, which could be seen if prices are converted to hard currency (FoB).
She also noted that since most of the fuel is traded on global futures markets, the effect of the latest record low crude prices may take time to trickle down given some fuel being delivered now had already been bought by the time world prices fell.
“Whatever is happening now, based on the little we have seen, will take at least a month or so to have an effect on the actual market because of the fact that most of the fuel is traded on the future volumes for pickings the following month,” she said.
What is also instructive is the fact that Zimbabwe’s fuel prices have also benefited from the dynamics on the global market, which has resulted in the FoB price, the basis on which the domestic retail price is calculated, coming down.
“Our price is lower than most of these regional countries and if you use the other exchange rate (parallel market rate), we (have) the lowest (price regionally).
“If you look at our price in December 2019, at the official rate, it was about US$1 and now its at US75 cents, so it has significantly dropped, maybe it is the biggest drop compared to the rest of the world,” she said.
Regionally, countries like South Africa and Malawi have cut their retail fuel prices in line with developments on the global market, where prices have plummeted on account of oversupply and a drastic fall in demand.
Eng Magombo said if comparing Zimbabwe to developments in the region, this must be contextual and done on the basis of the final US dollar price equivalent.
She also said the price of fuel in Zimbabwe was determined on the basis of five main elements that include the FoB cost, pipeline transportation expenses, taxes, exchange rate and finally the mark-up.
“When you look at those parameters, the biggest cost which has come down is the FoB cost and it is reflected in the reduction of the fuel price in US dollar equivalent price at the official exchange rate, which is very visible if you do the calculation,” she said.
The Reserve Bank of Zimbabwe fixed the exchange rate at ZWL$25 to the US dollar last month as part of measures to minimise the impact of the Covid-19 pandemic, which has killed nearly 200 000 and infected more than 2,6 million worldwide, on the domestic economy.
