Despite international oil prices having surged to fresh record highs on Monday, the situation is not yet a cause for panic, according to Absa industry analyst John Loos.
It was possible that petrol prices in Gauteng could reach R6 per litre (93 leaded) at the pump by October, he noted, thus pushing CPIX inflation (headline consumer inflation less mortgage rate changes) higher to around 5% in October.
Oil prices surged to over $70 a barrel on Monday on fears that Hurricane Katrina would threaten oil production in the Gulf of Mexico.
Commenting on the impact of the recent oil price rises in a research paper published on Monday, Loos said that although the current high oil prices could prove to be mildly negative for domestic economic growth, other factors could cushion the blow for South Africa.
However, Loos said, compared to the two oil shocks of the 1970s, the world is much more energy-efficient now, with the spot price of Brent crude oil having to rise above $100 per barrel to equal the peak price of the second 1970s oil shock, while still having less of an impact on global economic growth.
“At the present time, therefore, it is probably premature to talk of a global recession such as was the result of the 1970s oil shocks,” he writes.
“However, it is necessary to take the threat quite seriously, and to consider the potential implications.”
Although the consequences of a slowdown in world growth would be native for South African exports, two off-setting factors cited by Loos were that these shocks had proved to be short-lived in the past and followed by a significant decline in oil prices thanks to much weaker demand.
At the same time, he pointed out, underlying inflation sparked by rising oil prices in the US would cause likely cause the US Federal Reserve to begin cutting interest rates shortly after an oil shock.
This, combined with a worsening US current account deficit, would put the US dollar under selling pressure, which would result in positive spin-offs for South Africa, including rand strength which would help to offset local inflationary pressures.
Another positive for South Africa, Loos believes, would come from the effect of US dollar weakening on capital inflows to South Africa, causing the rand to strengthen and partly containing the inflationary effect of oil and shortening the duration of the shock.
“The current high oil price situation may well prove to be mildly negative for domestic economic growth,” writes Loos.
“However, some benefits for certain commodity prices, the expectation of some support for the rand and stable SARB monetary policy during this problematic period could be expected to cushion the blow.
“It is possible that petrol prices in Gauteng could reach R6 per litre by October, which could see CPIX inflation (headline consumer inflation less mortgage rate changes) moving higher to around 5% in October. At this stage, however, I do not believe that oil prices will take CPIX inflation to beyond (the SARB’s) 6% upper-target limit.”
Rather, he said, he expected to see some cyclical fall in Brent crude prices to around $50 by year-end, driven by a weakening global economy. This, coupled with a mildly stronger rand would limit the duration of the oil-induced inflationary surge.
However, added Loos, even should CPIX inflation breach the SARB’s upper 6%
target limit, it was not a foregone conclusion that it would raise interest
rates under the Reserve Bank’s modern-day monetary policy regime. – I-Net Bridge