Afloat but not alone in oil maelstrom

South Africa is at the mercy of two highly liquid and ruthless international free markets: the oil market and the currency market. Neither is going in our favour. Barring a rapid and miraculous recovery in the rand-dollar exchange rate, or dramatic fall in the oil price within the next week, the petrol price is set to rise by 20c a litre next month. Gauteng petrol is selling at R4,03 a litre and coastal at R3,92. Next month?s hikes will take the rand price of petrol to a new high.

Iraq said on Monday it would suspend some two million barrels a day of oil exports for 30 days. Key exporter Iran, which pumps more than three million barrels a day and exports just over two million, says it would also join an oil stoppage if another Muslim nation did likewise.

If one of the Islamic countries contributes to this issue we will do it,? Iranian Oil Minister Bijan Zanganeh said in South Korea when asked if Iran would join Iraq and stop oil flows without support from other Muslim oil-producing countries. He did not elaborate.

While a production stoppage by Iraq would not make a major dent on world oil supplies, the support of other Arab producers could prove disastrous. The threat is a clear reminder to the United States/Israeli alliance that the Middle East holds two-thirds of the world?s oil supplies and of the hyperinflation of the 1970s when the Arab oil producing nations stood together.

Commentators say its unlikely that the Organisation of Petroleum Exporting Countries (Opec) will allow Iraq to alter its cartel production and Saudi Arabia, the world?s leading oil producer and Opec?s major producer, has given assurances that it will compensate with additional oil production.

A strike at the state oil company of Venezuela, another Opec member, which led to a cut in supplies of crude and petroleum products to the US, has also added to US President George W Bush?s worries. Dollar crude-oil prices have risen 60% in the past five months following a fall to below $20 a barrel after the September 11 attacks. Bush may not be an intellectual giant but the cowboy understands money. It was oil that brought his father’s time in office to a single-term close and it is oil that is now threatening the US’s fragile economic recovery.

A rise in the oil price has an insidious and immediate effect in every country. Most immediately it affects fuel-dependent companies like airlines and transport operators. It hits producers where it moves through into the producer inflation. It hits consumers first at the level of individual consumption – at the pumps – and then it creeps up everywhere in price rises. First transport cost rises and then industries that rely on transport increase their prices.

South Africa has a double whammy. Not only is it victim of a higher oil price, it has to contend with a falling currency, lest we forget that oil is quoted and sold in dollars.

The South African Petroleum Industry Association’s Colin McClelland explains that the rand price of petrol consists of two components: external factors – which include the dollar price of the product on world markets and the dollar-rand exchange rate, and internal factors – which include rand-based dealer and oil company marketing margins, transport costs and taxes and levies.

The government and industry set the local component and it changes infrequently. The only change in the 2002/2003 tax year so far is a two cents a litre rise in the Road Accident Fund levy announced by Minister of Finance Trevor Manuel. The external component is volatile, highly liquid and can fluctuate radically on a daily basis. This change, however, is only reflected at the pumps once a month, and is adjusted retrospectively.

The question on South Africans? minds is: are we going to see the inflation rate rise as the petrol price rises?

Not necessarily, according to South African Reserve Bank chief economist Ernie van der Merwe. He says that, contrary to popular belief, an oil price shock does not necessarily have a direct link to inflation.

He explains that the oil price is an external price increase that may, or may not, lead to inflation. Van der Merwe draws a clear line between a price rise and inflation. ?Inflation is an ongoing or general increase in all prices over time. It is measured over the long term and is viewed as a continuous process. A steep rise in the oil price is a once-off external price rise that does not necessarily translate into an inflationary factor.? It may not, by implication, affect decisions on monetary policy.

He points to the rapid decline in the rand-dollar exchange rate in 1998. During the South-East Asian crisis there was a substantial drop in the value of the rand that had very little impact on inflation. He proposes that other factors, such as domestic consumers offsetting some costs, served to mitigate the inflationary pressure.

But the past 12 months have by no means brought a steady climb in the price of fuel. The price fell to 363c (Gauteng) in September from a high of 401c last June. It has risen and fallen over the period and this latest high of 403c comes after five consecutive rises. Before that there were three consecutive falls.

Despite Van der Merwe?s confidence, it has become clear that the Reserve Bank will miss its 3% to 6% inflation target for this year by as much as two percentage points. The bank is now targeting that level for 2003.

The rand’s sustained fall is a massive external shock, and a heavy blow for the newly started inflation targeting mechanism.

Economists suggest that the rand?s slide plays a far more inflationary role than one-off external price rises. The current general rise in prices is largely a trickle through from last year’s devaluation. The rising costs of imports are ongoing and sustained and filter through to all consumer prices. If food inflation – which makes up more than 25% of the index – is stripped from the CPIX (the consumer inflation measure used by the Reserve Bank for inflation targeting), inflation falls within the targeted range. The oil price is just one component, but it is certainly one consumers feel hard soonest.