The ever-present threat of a sudden spike in global oil prices, and the resulting impact on slow-growing and struggling economies such as Japan, Germany and France, poses a significant risk to local exporters who rely on those markets for much of their business.
This is the view of Credit Guarantee’s senior economist Luke Doig, who says that with global oil consumption at an all-time high of more than 82-million barrels per day (bpd), and the Organisation of Petroleum Exporting Countries’ spare capacity limited to between two million bpd and three million bpd, this is “a very real threat”.
Doig says spare capacity has declined, even without interruptions of output in major producing countries. Spare capacity throughout the energy supply chain is limited and supply additions will take a long time to complete.
“An interruption of supply for whatever reason could send the oil price soaring. Several of the world’s major developed economies, not to mention many of those even more fragile developing ones, could be seriously affected by this,” he adds.
Doig points to a recent Goldman Sachs study that included a prediction that oil prices are in the early phase of a “super-spike” that could surpass $100 a barrel, a contingency that the International Monetary Fund (IMF) declined to rule out.
The cost of a barrel of oil is expected to increase to $75 in 2006 and $105 in 2007, before gradually sliding back to just $30 by 2010 as high prices spur investment in oil and cause demand to shrink.
“There’s no denying that the negative impact of robust global oil prices has been relatively well managed up to now by the world’s central banks; however, this is by no means a guarantee that they will be able to contain the effects of an unexpected and significant surge in these prices going forward,” he notes.
The impact of Chinese oil consumption on global prices is massive, with the IMF predicting that it will come close to matching United States consumption of about 25% of total global consumption by 2030. Currently, Chinese vehicle ownership stands at 16 vehicles per 1 000, but this is expected to soar to 267 per 1 000 by 2030, compared with the US figure of 843 per 1 000, up from a current 812 per 1 000.
Closer to home, Doig say oil importing countries in sub-Saharan Africa could be disproportionately affected by an increase in oil prices, because fuel costs in the region are particularly high relative to gross domestic product.
“Sharp fluctuations in oil prices could lead to big shifts in the current account balance of sub-Saharan countries. This, in turn, could lead to a sharp contraction in consumption, as these countries have limited access to international capital markets to finance an increase in the current account deficit,” he explains.
Despite being a significant oil importer, South Africa should be less affected because a significant proportion of its liquid fuel requirements are met by Sasol’s relatively price-insensitive coal-to-liquids and gas-to-liquids technology.
“Once again, prudence is the order of the day when doing business offshore. Key risk factors such as the global oil price need to be factored into all negotiations to reduce the risks of default or non-payment, particularly when longer-term projects of six months or more are involved,” says Doig. — I-Net Bridge