How fuel increases affect the economy

Some things can really set our teeth on edge, like the screeching, rasping sound of fingernails scraping across a blackboard, but fortunately, we as the general consumer public don’t experience that too often for ourselves! 

What really raises our collective hackles however is the inevitable announcement by the government that the fuel price will rise yet again! The price of fuel (both petrol and diesel) affects every one of us either directly – when filling our vehicles’ fuel tanks for instance, and indirectly – impacting the sales price of consumer products, especially basic foodstuffs. 

Economists specialise in examining the outcomes of fuel price increases on the economy and provide detailed in-depth analysis of these effects; much of which is beyond the scope of the average citizen who simply feels the pinch in his/her wallet and the unavoidable lighter shopping basket carried out of the supermarket.

We at Kainos appreciate this fact and that Jannie-average-citizen would like the whole issue to be addressed in a simple understanding way; so we have put together some insights for you that will hopefully go some way to answering your concerns.   

  • When is the fuel price adjusted?
  • How is the increase fixed?
  • Who/what is most affected by fuel price increases?
  • What is a microeconomic level?
  • What is a macroeconomic level?

In South Africa, the fuel price is adjusted on the first Wednesday of every month.

The price is fixed according to two principal factors: 1) the rand/US dollar exchange rate (the currency with which fuel is purchased), and 2) international fuel prices (how much it costs to buy the fuel). Neither of these is within this country’s control.  

Higher fuel prices translate to each of us having to pay more per litre at the pump, which means we have less money to spend on other goods and services. But higher fuel prices affect more than just the cost to fill up at the petrol station; higher fuel prices have an extremely negative knock-on effect on the country’s broader economy, both at a microeconomic and a macroeconomic level.

At a microeconomic level, we find that smaller and sometimes more specialised businesses struggle. The smaller the business, usually with smaller – or no – reserves, the more difficult it is for the business to absorb the impact of lower consumer spending. Additional strain is put on the business because supplier costs rise since the suppliers are also dealing with increased costs of their own, especially when it comes to transport. Furthermore, many products contain some petroleum-based plastics or synthetic materials so higher oil prices mean higher prices for these materials and therefore higher manufacturing costs also.

Transport costs jump in sync with a jump in the fuel price, especially concerning public transportation services like taxis and busses and these costs are passed on to the consumer. And consumer goods jump in price accordingly because manufacturers have to recoup their additional fuel expenditure.

On a macroeconomic level a fuel price increase lessens product output and alters the entire structure of production and spending, but most damaging of all, it shifts the country’s economy downwards to a lower economic growth path. In a nutshell, a fuel price increase has a significant impact on the economy’s level of real gross domestic product (GDP) and economic performance. 

Some economists have cautioned that rising fuel prices could negatively impact a country’s economic recovery in terms of business expansion and therefore hiring practices. Rising fuel prices may force some businesses to re-evaluate their expansion plans, holding them back because they are uncertain about the economy’s health and whether they can afford to invest in employing additional workers. Some businesses may even close or downscale resulting in a rise in unemployment figures.


Though economists and analysts may argue about the extent to which fuel prices have an effect on the economy, they agree that there is certainly a solid connection between consumer confidence, spending habits, and fuel prices. Various international surveys show that increases in fuel prices make Jannie-average-citizen pessimistic about the country’s economy as a whole which in itself can have other unexpected effects, such as potential turmoil in the political field as a knock-on consequence of growing unemployment to name but one.