So, recently oil prices have risen from $30 a barrel at the end of 2015, to the current price of $78,63 per barrel. Multiple factors have caused this increase in the oil price, including the continued political turmoil in oil-exporter Venezuela, US sanctions on Iran and a simultaneous worldwide increase in demand.
Although less severe in nature, the sharp increase in oil echoes the oil crises of the 1970s. Oil increased by a factor of five during that decade, initiating a global recession. Coinciding with rising oil prices, the rand has lost some of the steam it had gathered shortly after Cyril Ramaphosa’s presidential victory. These two factors combined caused the deputy director-general of the Department of Energy to identify rising oil prices as a major threat to the South African economy.
This article will briefly review the possible threats more increases in oil hold in for the South African economy.
The combination of higher oil prices and a weaker rand are placing consumers under severe pressure. Petrol prices had increased for two months in a row now, and a further increase of 74 cents per litre for petrol and 81 cents per litre increase in diesel is expected in June 2018. These increases have a severe effect on disposal income and can lead to a large decrease in consumer spending, which makes up the largest portion of South Africa’s GDP. Consumer spending has further been hurt by the 1% increase in VAT that came into effect in April. As such, consumers will have to spend more money on fuel, which will hurt other areas of consumer spending, and ultimately South Africa’s GDP.
The increase in fuel prices will also increase South Africa’s inflation rate dramatically. Oil is a key input in almost all production processes, and an increase in the price of this input will raise the prices of goods produced by these firms. Not only that, but transportation costs will increase along with the costs of production. The increase in costs suffered by firms will be passed on to consumers through the increase in the prices of goods, placing consumers under even more pressure. The weaker rand will also increase the cost of all the other goods imported by South Africa, since the goods are bought with foreign currency.
Therefore, the prices of imported goods will increase as well. This inflationary threat will most likely cause the Reserve Bank, who meets later this week, to keep the repo rate unchanged, whereas they would have been able to lower it if fuel prices had remained low, and thereby enabled stronger economic growth through relaxing the debt burden on consumers. Clearly, rising fuel costs have stymied an opportunity for the Reserve Bank to enact repo rate changes that would’ve enabled economic growth.
In conclusion, an increase in fuel price is extremely detrimental to the prospects of South African economic growth. Consumers are placed under increasing pressure and they must spend a larger and larger part of their budget on fuel. This prohibits spending in other areas and slows an increase in the largest section of South Africa’s GDP makeup. Furthermore, inflation is expected to rise due to the weaker rand and increasing fuel price. As such, consumers will most likely not benefit from a smaller tax burden as the Reserve Bank will probably keep the repo rate unchanged to fulfil their mandate of keeping inflation low. These hits to the South African economy can only be reversed or nullified through a strengthening of the rand or reduction in the price of oil, both of which seem highly unlikely.