South Africa: No cheer in the oil story

Oil prices approaching $100/barrel, until recently dismissed as the industry’s Utopia, now look like a dead certainty over the next few years. It’s a scenario that presents SA’s economic policy makers with formidable headaches. On the monetary policy front it will inevitably push the current account into even wider deficit, threatening the relatively steady performance of the rand of late. Not only has the strong rand offset the impact of high oil prices, it has also had a wider effect of limiting imported inflation.

High fuel prices hit the poorest the hardest as they rely on taxis and public transport to get around. These modes of transport have no margin to play with and pass on higher oil prices immediately. Rising transport costs also have a knock-on effect on other consumer good prices.
As government ponders its response its strategy should focus on two priority areas: the pricing of petrol and the supply of refined fuel. With a bit of political will, pricing is the easier of the two to solve. South Africans are paying over the odds for an already expensive commodity, as more than a quarter of their petrol money goes to government in the form of various taxes, notably the fuel levy and the Road Accident Fund levy. The spike in oil prices over the past few years has brought the system into sharp relief and government must put a lid on the rise in the levies and taxes imposed on the petrol price.

In the longer term, a more competitive fuel market is the answer. Government has stated that it will continue to regulate the petrol market and prices but the FM believes the time is ripe to open the debate on the fuel pricing issue.

Security of supply is a far more complex issue. Fuel demand last year exceeded local refining capacity and supply from Sasol and PetroSA’s synthetic fuel output for the first time. With fuel demand projected to grow at more than 2,5%/year over the next few years, SA’s reliance on oil imports will increase further. That in itself is not an insurmountable problem, but SA’s lack of capacity to refine it is, given that the oil majors have not invested to raise capacity. Two solutions present themselves: a new, 150 000 barrel/day refinery by 2011 and/or building another coal-to-liquid fuels plant larger than Sasol’s existing Secunda plant.

Either of these projects could cost in excess of US$8bn. The oil majors and Sasol are unlikely to take on these projects by themselves.

Financial Mail