Oil rigs

15 Jun 2022

Double, double oil and trouble

Delving into South Africa’s oil-price crisis

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Ep26: Fuel price: how high can it go?

In this episode, host Jeremy Maggs and guests, Investec Equity Analyst Herbert Kharivhe and Wandile Sihlobo, Chief Economist of the Agricultural Business Chamber of South Africa, discuss the impact of the oil price on fuel, electricity and food.

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There’s now a very serious downside to filling up your tank, with the oil price a staggering 40% more expensive than it was 12 months ago. But there’s more to this worrisome trajectory than your frantic fuel gauge: the question of how a rising oil price will impact on the cost of electricity and food in South Africa. 

How we got here

The rising fuel price comes down to three factors. The one we’re all discussing is Russia’s invasion of Ukraine. As Russia is one of the top three global oil producers, the war and subsequent Western sanctions have had a massive impact on oil prices the world over. We also need to factor in policy reform – governments are falling out of love with fossil fuels and decommissioning refineries, resulting in a loss of investment in the sector. Finally, we must consider that age-old tension: supply simply not keeping up with demand.

As the oil-price crisis unfolds and our wallets fold, our expert isn’t optimistic. “I think it’s safe to say that, in the short term, there is still more pain to come,” says Herbert Kharivhe, Equity Research Analyst at Investec. “Given all the dynamics at play, I think it's too soon to call when we may begin to see some relief.” He was speaking on Investec’s fortnightly podcast, No Ordinary Wednesday.

Petrol to pantry

With the large majority of our food is transported by road, exactly how are these next-level oil prices impacting on our pantries?

“The first thing that many people have been asking me is whether South Africa has sufficient food supplies,” says Wandile Sihlobo, Chief Economist of the Agricultural Business Chamber of South Africa. “I would say the answer to that is yes.” He was also a guest on the podcast.

While food-price inflation is moving at much the same pace as last year, those lower on the income scale are still set to feel the pinch.

Says Sihlobo: “This is where it's relevant to look at the [shopping] basket of the people in the lower LSM (living standard measure). You find that they buy a lot of oils, maize meal, bread and samp – and those are also the products that are rising at a faster pace.”

“You will see food price inflation averaging somewhere between 6% and 6.2% this year. Yes, that will be intense, but it will be intense just for those few months. What will assist a lot is the deceleration that we are expecting in fruits and vegetables, but also meat prices that are moving sideways.”

“The next two months are critical,” emphasises Sihlobo. “I think that's when the increases that the food companies are making will pretty much show up in the retail prices of a range of products. So, looking at where the households will be at that time would be an important thing to monitor.”

Flipping that switch

When it comes to keeping the lights on and bemoaning South Africa’s heavy reliance on expensive diesel, our expert says we’ll simply have to make do. “Eskom does have a big brother called government underwritten by the taxpayer – you and me. So, the country will have to make a plan and come up with a way to fund the diesel costs.”

“This is money we could have spent on education, health care, debt reduction… But now we are going to pretty much use it elsewhere, just to keep the limited supply of electricity going.”

There’s no denying the perpetual angst caused by Eskom’s failures and loadshedding. “Added pressure is coming because your savvy customer, the one that's able to pay, is adopting renewables and slowly moving away from the grid. So, the outlook [for Eskom] is not good,” says Kharivhe.

With another hike looming in the not-so-distant future, anxiety is running high. "We have made some positive strides but there is more that can be done," Kharivhe explains. "In the immediate short term, I'm afraid we are going to have to take some pain."

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