File picture: Karen Sandison/African News Agency (ANA).
File picture: Karen Sandison/African News Agency (ANA).

OPINION: Why the fuel price outlook for SA is bleak

By Lukman Otunuga Time of article published May 20, 2019

Share this article:

JOHANNESBURG - Rising fuel prices are the bane of every South African's life. When the price of fuel goes up, so does the cost of living, and we feel it everywhere, from our groceries to the electricity we use and the taxis that get those of us lucky to be employed to work and back.

The sad truth is that we rarely feel the relief when the price comes down, it just plateaus for a bit.

By May this year, consumers had been hit by no fewer than four price hikes. We now pay R16.68 for a litre of 95 unleaded and 20c less for 93 unleaded. Diesel, though, only went up by 1c. Some of the latest increase went towards transport levies; paying for the pipeline that brings the fuel up from the coast, the road network and shoring up the much-maligned but still critically vital Road Accident Fund.

The bulk of the increase is beyond even the government's control - the devastating double hammer blow of a weak rand and geopolitics spiking the actual dollar cost of crude oil - which jumped from $69.01 (R992.71) a barrel on April 1 this year to $74.57 by April 23. By the time South Africans went to the polls in the first full week of May, it had settled back to an average $70, but the damage had already been done.

Although Opec and its strategy of cutting supply have played a role in higher oil prices, the biggest factor has been the US decision to reimpose sanctions on Iran.

Washington's decision, which was first imposed following the collapse of the nuclear deal between the US and Iran in 2015, immediately created a buying panic throughout April, pushing up the price as demand outstripped supply while buyers tried to counteract the potential loss in the pipeline of 2.6million barrels of oil per day from Iran.

India is particularly affected, as it is Iran's second-biggest customer, with a deal in place allowing it to source cheap oil from the state. Saudi Arabia, the major regional security and economic powerhouse, has said it can make up the Iranian shortfall should this be needed - indeed the US has been in talks with it and its neighbour, the United Arab Emirates (UAE), but the kingdom is bound by its links to Opec.

Traditionally, the main function of Opec is to control supply of oil in the global market, which has had an indirect impact on oil prices. Opec consists of 14 member countries, currently Iraq, Iran, Kuwait, Saudi Arabia, Indonesia, Libya, the UAE, Algeria, Nigeria, Ecuador, Gabon, Angola, Equatorial Guinea and Congo. The cartel is scheduled to meet in June to decide on the future of this strategy and, literally, whether to open the taps or not.

The problem is that no one knows for sure what Opec will decide next month and the uncertainty is only serving to fuel panic, pun intended, buying and keep the price up.

If Opec does decide to continue with the programme of curbing international supply, the oil price is likely to stay high. The consequences for South Africa with its flagging economy, high unemployment and a third of the country dependent on state grants are dire.

No South African needs reminding: a jittery Eskom is increasingly dependent on oil to bolster its weak coal supplies to keep the national grid up and running. Everything we buy has to be transported; whether it's produce from the farms or imported items landing in Durban or Cape Town. Everything is affected, even the most basic, most staple foodstuffs, like the price of a loaf of bread.

Inflation rises and to counteract that spiral, the SA Reserve Bank then steps in with the only mechanism it has - hiking the interest rate to try to stop this runaway train, putting even more South Africans, this time in the middle classes, very close to the financial abyss, facing foreclosure on their mortgage bonds and losing their homes or their cars bought on hire purchase.

The outlook for businesses is just as ominous, spiralling costs cut into profit margins until the only way to survive is to cut jobs and put people on the streets, adding to the general misery. It's a vicious cycle that moves from recession into full-blown depression - something that no country can afford but least of all South Africa, still coming to terms with nine years of state capture and corporate collusion which has fundamentally compromised an already weak economy.

So, is there an upside? Well, Opec could loosen its chokehold on the international supply and literally open the taps.

This would take the pressure off the oil price, which would subside, but for South Africa to see the benefit, the rand would have to be strong, otherwise we would be back at square one. But if the rand is strong, then the vicious cycle turns into a virtuous cycle; pump prices at filling stations could drop to pre-Iran-sanctions-waiver levels, easing the burden on consumers and companies.

The economy should continue growing at the expected pace instead of declining, thus improving prospects for the rand's competitiveness and spending power versus other currencies. Interest rates would probably remain at current levels, meaning that companies and households would have a predictable basis for their borrowing.

The reality is that South Africans already pay a premium for their fuel, higher than many of their neighbours, whose fuel, ironically, is landed at South African ports and transported north. Until then, though, the outlook is bleak, any upward spike in the fuel price internationally could have far greater consequences than just plunging South Africa into an economic morass.

Lukman Otunuga is a research analyst at FXTM.


Share this article: