As Brent crude oil surged towards $120 (R855) a barrel yesterday, the outlook for inflation worsened dramatically.
Bloomberg reported the spike above $119 a barrel was based on estimates that Libya has lost as much as two-thirds of its oil output due to the turbulence in that country. And it quoted analysts forecasting a rise towards $200.
The price subsided later to to trade around $114.40 at 5pm
In mid-2008, the oil price peaked at $147, then fell below $40 by the end of that year when the collapse of US investment bank Lehman Brothers triggered a credit crisis and a global recession. The inflationary pressures caused by the record oil prices are seen as partly responsible for the events that followed.
Fortunately for South Africans, the rand has made gains recently, firming from R7.30 to the dollar 10 days ago to R7.0626 at 5pm yesterday.
The stronger currency cushions the impact of the oil price increases but the rand gains have not been enough to fully neutralise them. The petrol price is likely to rise by about 40c a litre next week when the domestic price is adjusted in line with a basket of international oil product prices.
This will push the price of 95 octane unleaded to about R9.39 in Gauteng. April will bring further pressures as the general fuel levy increase of 10c a litre, announced on Wednesday by Finance Minister Pravin Gordhan, kicks in.
The impact will spread through the economy, pushing up prices of goods and services as transport costs rise.
Nedbank economist Carman Altenkirch said yesterday: “The risk of an earlier interest rate hike has increased.”
Altenkirch described the rand as “a key risk in the outlook for producer inflation”.
She said: “Higher global agricultural and commodity prices will feed through more quickly into domestic inflation, without the offsetting impact of an appreciating rand.”
John Loos, a property strategist at FNB Home Loans, put out a note yesterday on the potential effect of rising oil prices on the property market.
He noted that the 2008 oil price spike “played an important role in the housing slump at that time and such a spike can do so again. With the crisis seemingly having become a multi-country issue, it significantly raises the risks to the economy, to inflation, and thus to the well-being of the local residential property market.”
He said the higher oil costs would hamper economic output, job creation and income growth; would drive up inflation, reducing purchasing power; and could prompt an early interest rate rise.
The Reserve Bank’s repo rate, at 5 percent, is at a 30-year low. And, at the start of last month, there was little expectation of a rate rise this year.
But the rand has depreciated from R6.60 a dollar on January 3. Combined with the recent run up in the oil price, after political uprisings in Tunisia, Egypt and Libya, this has changed the outlook.
Gordhan said in Parliament yesterday, according to Bloomberg: “North Africa is already having an impact on us and the rest of world. If oil continues increasing, that’s going to have a significant impact… It’s something that has to be managed carefully.” - Ethel Hazelhurst