Oil price collapse should help South African economy
JOHANNESBURG - The oil price collapse should help the South African economy as it will lower fuel costs and so lead to lower prices for those goods and services where transport is a significant factor.
Oil markets on Monday fell the most since 1991, when the first Gulf War ended, after the disintegration of the OPEC+ alliance on Friday looked set to trigger an all-out price-war.
Crude oil futures dropped almost 30% after the Saudis slashed official prices on Saturday by the most in at least 20 years, and said they would maximize their output. US oil prices were last trading at $27.59 a barrel, while the global benchmark Brent crude was at $31.66 a barrel.
The South African Reserve Bank assumed that the Brent oil price would average $66.50 per barrel in 2020 at the January Monetary Policy Committee (MPC) meeting when it cut the repo rate by 25 basis points. At less than half this oil price assumption, there will be intense pressure on the MPC when it meets next week to cut the repo rate further. Already several central banks have cut their policy rates in response to the expected slowdown caused by the coronavirus.
Paul Makube, the senior Agricultural Economist at FNB Agribusiness said last week that the latest drop in the fuel prices will provide relief for farmers.
“The cumulative decrease in petrol and diesel so far this year will help limit the impact of the expected fuel levy increase of 25c per litre by April 2020. This will likely contribute to positive cash flow, lower cost of production and improved profitability as petrol and diesel make up a significant amount of farm input costs. The drop comes at a critical time as farmers start stocking up on diesel ahead of the harvesting period. Moreover, farmers are increasingly using petrol and diesel for backup generators in light of the current power supply challenges,” he said.
“Given that 70% of South Africa’s food is transported by road, the decrease in the petrol and diesel price is likely to have a positive impact on food inflation, easing pressure on consumers who are already struggling to make ends meet. This may possibly lead to further interest rate cuts later on in the year, given the improved inflation expectations,” he concluded.
BUSINESS REPORT ONLINE