Economists and business leaders are relatively unfazed by the world oil price spike, arguing it may be temporary and that South Africa has “shock absorbers”.
“We have a strong currency, which is bit of an insulator for the high oil price,” said Transnet CEO Maria Ramos. “I’ve the sense that markets are overreacting. There are important changes in market fundamentals, particularly in the supply side with Iraq out of action. But for now I’m concerned, not panicked.”
Economist Iraj Abedian said he believed the $39 a barrel oil price was unsustainable in the medium to long term. “We will soon see downward pressure on the price; it’s not in oil-producing countries’ interests to have them sky-rocketing. South African markets are likely to hold out.”
At current exchange rates, a $1 move in crude oil prices, sustained for a month, produces a 7c price change at the petrol pump. A 10c change in the rand against the dollar produces a change of 2,2c. South Africans spend R105-million a year on petrol and R73-million on diesel.
Iraq, with a four million-barrel capacity, is currently producing a million barrels a day. However, analysts said the European and American summer, as well as the likelihood that China would rein in its overheating economy, might dent oil demand.
Abedian insisted South Africa was better placed to weather the oil spike than many other countries, as it had “built-in stabilisers. If the oil price continues at high levels other commodities, like gold and coal, will increase in sync because of global uncertainty. This would compensate from a balance of payment viewpoint.
“While the rand has a strengthening bias it will largely compensate for the increasing dollar price.”
Athough synthetic production at Sasol and Mossgas accounts for about 28% of the fuel consumed each year in South Africa, local prices are based on international prices.
Ramos said the local inflationary impact would depend on how far world prices continued to rise and would only be felt next month. However, the petrol price is expected to increase by about 35c a litre.
Every 10% increase in the petrol price adds 0,46% to CPIX (inflation minus mortgages). A 10% increase in diesel prices adds about 0,4% to producer price inflation. Econometrix’s Tony Twine has predicted the oil spike will add between 1,7 and 1,8 percentage points to CPIX (consumer inflation minus mortgages).
Ramos said that it was too early to assess the effect on Transnet’s business. “Apart from South African Airways, we have not increased tariffs in other businesses in response to the oil price.”
Last week SAA imposed a R28 levy on domestic and short-haul regional flights and a R70 levy on international flights. All tickets sold outside SA will include a levy of $10.
AgriSA economist Johan Pienaar said increased transport costs would affect food prices. However, the current harvest was planted last year and would be unaffected.
There are also fears that the oil price shock will force inflation beyond the Reserve Bank’s target band of 3% to 6%, although governor Tito Mboweni can invoke an “escape clause” in the event of exogenous shocks.
Abedian said the inflation band was unlikely to be exceeded because of the temporary nature of the spike. Brian Kantor, Investec’s investment strategist, said the Reserve Bank “should make it quite clear that what goes up now will come down later.”
The spike should be ignored by monetary policy. “For the sake of the real economy you don’t raise the interest rate. That’s the fundamental lesson we should’ve learnt from other oil price shocks.”