Pressure on SA but oil outlook offers hopeComment on this story
South Africa is at the mercy of many global forces. The ebb and flow of money around the world has been the main focus of late, with the rand steadily losing ground against the dollar and other major currencies over the past few years.
One way South Africans have felt the impact is through the price of petrol, either directly at the pump or the knock-on effects as transport costs rise.
The cost of 95 octane in Gauteng has risen from R10.82 a litre at the start of 2012 to R11.86 a year later, R13.57 at the beginning of January and R14.33 this month.
The knock-on effect sent local inflation to 6.6 percent in May, way above the Reserve Bank’s 3 percent to 6 percent target range. The inflation rate triggered a 0.5 percentage point rate hike earlier this year. The Reserve Bank repo rate is now at 5.5 percent and more increases are on the way. The bank’s monetary policy committee will meet this week to decide on its next move.
All this when the country’s growth outlook is slumping. The International Monetary Fund has revised estimates for domestic growth this year from 2.9 percent – a forecast made in October last year – to 2.8 percent in January and 2.3 percent in April.
And another downward revision may be on the way as a combination of rising inflation and rising rates continues to sap the economy’s ability to grow.
The prospect is gloomy right now.
However, another powerful global force could provide relief in future: the cost of crude oil. Rising oil prices eat into disposable income, slowing economic growth and, since the 1970s, global economic growth has been hostage to recurring spikes in the price of oil. Basically, the problem has been that oil demand has grown faster than supplies.
The situation is periodically aggravated by geopolitical factors such as wars in the Middle East. When Sunni forces attacked the Iraqi government last month, Brent crude oil rose to a nine-month high of $115 a barrel, before dropping back to trade at $106.66 on Friday.
There is no end in the sight to the Middle East unrest, so there will be continuous price swings.
But the basic pattern of supply and demand may change next year – at least for a while.
Andrew Tully, writing on the website Oilprice.com, notes that Opec is cutting its forecast of demand for its own oil next year by 300 000 barrels a day.
The reason, he says, is an increased supply of crude from other sources, particularly the US and Canada.
Opec’s secretariat in Vienna estimates that demand for crude oil from the 12 Opec members should remain at an estimated 29.7 million barrels a day this year, but will drop to 29.4 million barrels a day next year.
It says the oil supply from non-Opec producers is expected to grow by 1.3 million barrels a day to 57 million barrels a day in 2015, at a time when the global demand for crude is estimated to be 92.3 million barrels a day, up from 2014 by only 1.2 million barrels a day.
In other words, supply growth will outstrip demand growth.
Tully says the Opec report does not come as a surprise.
“Dependence on Opec oil is declining as the US and Canada use hydraulic fracturing, or fracking, to extract previously untapped supplies of crude from underground shale deposits.”
Fracking, however, remains highly controversial – including in South Africa, where there is potential in the fragile Karoo. The process is banned in some countries and is opposed in others because there are fears that the water-intensive methods needed to achieve results will damage the environment.
Early last week, the New York State Court of Appeals upheld the right of municipalities to ban hydraulic fracturing for natural gas within their borders.
For this and other reasons, fracking may not deliver on expectations.
Tully says that despite the recent increase of North American crude output, Rostam Qasemi, Iran’s oil minister, cautions that non-Opec oil output may not be as generous as many believe. He says that not all countries are capable of extracting any shale reserves they may have, and stressed that reserves of US shale oil “should not be exaggerated”.
The debate around fracking highlights the frequent trade-off between economic growth and protecting the environment for future generations.