R40 per litre petrol? Oil taps likely to open before that, say economists

South Africans should avoid going into a panic over suggestions that the petrol price could go as high as R40 per litre, as some economist economists believe supplies of oil will stabilise long before the dreaded $200 forecasted oil price is reached.

As of Monday, the oil price was at a very high $130 per barrel, and while oil traders have predicted this to increase to $200 by the end of the March, there were also predictions that motorists would have to fork a hefty R40 per litre on petrol.

While these forecasts have been making headlines in worst-case-scenario speculations at the weekend, motorists should not believe the hype just yet, said economists.

How high can the oil price get?

Economist Dawie Roodt said that despite the oil traders’ forecasted $200 oil price not being totally impossible, this massive price would probably not be here to stay.

One of the reasons is that while this would be profitable for American frackers who are going to milk the opportunity, other suppliers might eventually force the price to come down, explained Roodt.

“There are may other alternatives that can be used. I know Americans are already talking to the Venezuelans, and Venezuela is currently under sanctions. It’s not impossible that they even talk to the Iranians, who have been selling oil illegally by the way. They can simply start selling oil to the main market.”

“Although there could be a short disruption, I don’t think $130 dollars will be with us for too long either. Soon someone is going to open the taps and the oil price will come down,” said Roodt.

This view was echoed by University of Johannesburg economist Peter Baur, who said that while the US was the largest supplier, followed by Russia, there were reserves around the world, despite the US considering banning exports from Russia.

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“I think we need to just avoid the hype that the petrol price is going to hit that R40. Conflicts with Russia and Ukraine are likely to slow down a bit. We see that [Russia] are not moving forward as much as they expected, as wars are very expensive to run. I think it would move to a long-term kind of conflict…”

“We have suppliers in other countries, too. I think [the oil price] will start to go down to normal. There is obviously the run because of the conflict, and I think just a bit of a panic-buying, but I don’t think it’s going to stay there for long.”

Man on the street will be hit hard, no matter where prices settle

For the oil price to reach $200, that would push up South Africa’s inflation to between 7-8% or even more, while the US could also increase their rate to between 8-9%, said Roodt.

“As it is, the petrol price is already, as of this [Monday] morning, going to go up with another R2.50 or so. We know that we will see a jump… For now, the petrol price going up to R24 or R25 a litre is quite possible.”

What should be of concern is the “insane” increase in wheat prices. Baur said wheat prices went up to $1250 per bundle on Monday morning, as compared the $800 rate on 21 February.

“Meaning the food price has gone up by more than a third. That is a huge increase. Most of that ties up with the European and Russian conflict.”

“When you look at these kinds of prices, there will be consequences of increases of food prices and petrol. It is going to put pressure on inflation, food prices, and a huge amount of additional pressure including transportation costs, and manufacturing. Industries as well as production is going to obviously be very much impacted by this. They are going to feel the fuel prices,” said Baur.

Not only that, but this would force the Reserve Bank to up the interest rates due to higher inflation, said Roodt.

“Some places in the economy are likely to do well, like mining and agriculture because of high food prices, but other parts of the economy are going to suffer and the whole economy is going to suffer. It will lead to the increase of unemployment and all those things. Everyone will be affected, and your salary is never going to keep up,” he said.

Silver-lining for the Rand

On the upside, the Rand was doing well, sitting at R20.25 per British Pound and R16.69 for the Euro as of Monday morning.

ALSO READ: Ukraine fallout: gold reaches 17-month high as oil price surges above $100

Under these sorts of circumstances, Roodt said it was expected for the local currency to take a knock.

“It is behaving nicely because not only the oil price has gone up, but other commodity prices as well, like platinum and gold and that is all supporting the exchange rate of the Rand. If the oil price comes down, then the platinum price would probably come down as well and that could lead to a weaker currency,” said Roodt.

The Rand’s strength has been ongoing since the middle of December but interest rates will attract foreign capital and investors, as it will signal to the world that the country could manage interest and inflation rates, said Baur.

“We may try and protect the value of the Rand because we cannot afford another decrease in credit rating any further. They are already on our case,” he said.

rorisangk@citizen.co.za