OPINION: A $100 barrel of crude oil spells big trouble for SA economy

By Ambassador Bheki Gila

LOOKING at the recent political events in South Africa, it would seem as if it doesn't take much to expose its economic underbelly, with disastrous long-term social consequences.

And considering the tenuous relationship between and among the millions of unemployed people, an administration with a complicated attitude towards economic growth and an extremely wealthy class that lacks empathy, the masses have been viscerally conditioned to react in only one way every time discontent manifests itself. Violence.

There is no doubt that a $100 (R1,460) barrel of crude oil will be an uneasy political moment, an unwelcome one at that.

A government that is afraid to govern, always finds excuses not to take hard decisions, especially by avoiding those areas which may somewhat perturb the financial interests of its political underwriters.

Unexpectedly, however, the Covid-19 environment has brought with it a handful of advantages, which allowed the legislature to churn out laws in quick turnaround under the pressures of an emergency.

A crisis in our particular case, is a legislative opportunity to craft laws which can address problems that have plagued our sovereignty and its people for a protracted period of time.

To that end, a looming energy crisis, therefore, must not be allowed to go to waste. We may prevent it from happening. Or else, the legacy price it may cost after the fact, this generation or any other after it, will find it impossible to pay.

The country's energy economy has been slowly unravelling, allowing for the closure of two crucial crude oil refineries, and sadly witnessing the de-industrialisation of its infrastructure at a rapid pace.

The reported financials of the National Oil Company are less than ideal and this energy giant may be scrounging around with a begging bowl, to a government scrounging around with a begging bowl. Really, like begging Peter to beg Paul.

The image is not enterprising. And the end of this saga will not be edifying neither.

The closure of the Cape Town Refinery has exerted an enormous psychological pressure on the policy makers on what to do with the Saldanha and Milnerton facilities.

If the trend does not reverse, we may soon be a hopeless and shrinking economy wholly dependent on imports, refined by someone else.

The cost to talent, livelihoods and taxable revenues lost, is calculably high, unnecessary and intolerable.

Sadly, it is adding to millions of unemployed youths and many others who are unhappy, desperate and too willing to violently stir the political powder keg.

The glib that oils the administration's political evasiveness, is the over simplification that the oil price calculated against a weakening rand versus a ravaging dollar, is what ineluctably results into higher fuel prices.

That may just as well be. But then again, the rand/dollar exchange is a consequence of a complex pricing model. It is not the cause.

For one, South Africa has no petrol price. It has a built up model whose constituent parts have incendiary emotive qualities.

A crisis like a $100 barrel should jolt the government to do what its erstwhile Minister of Energy Jeff Radebe once announced. To our collective anticipation, he promised the establishment of an Energy Task Team to review the current pricing model.

It is urgent. It is necessary. Established timely, another social crisis may be averted.

In our long energy history dating back to 1954, different administrations have had to weigh in on the relevance of their fuel pricing models against prevailing circumstances and their effect on the economy overall.

And so we have experimented with a variety of models, for good reason because no single model has been suitable under all conditions through an infinite linear time scale.

We have moved from the In Bond Landed Cost to the Basic Fuel Price (BFP).

And somewhere in between, in order to regulate the wholesale margin, we went from Petroleum Assets Return, then to the Marketing of Petroleum Assets Return, all across to the Regulatory Accounting System.

We are now experiencing the denouement of the dalliance between a consenting government and the charming dark arts of the fossil behemoths.

The BFP abracadabra, introduced after the advent of the democratic dispensation, was a compromise with a government of a people in order not to collapse the fragility of an economy battling to forge a united nation out of the ruins left by a morally bankrupt apartheid administration.

Over time, too many bruising realities have ravaged the seams of our socio-economic fabric. We are yet to fully implement the recommendations of the Windfall Tax Task Team, the Moerane Inquiry and the Liquid Fuels Industry Task Force.

And not surprisingly, the dizzying spell wrought by the BFP model is fast losing its potency and a looming energy crisis may just interrupt the romance, and shine light on the magic of perfidy.

What brings us to a $100 barrel of crude oil or even more? A barrel that costs that much is like a perfect political storm.

It requires a lot of conspiratorial agencies to converge at the same place at the same time.

Coming from a WTI contract priced below zero dollars in April of last year to more than $80 per barrel to date, we can account for the prominent factors, starting with Europe's inclination towards alternatives. Wind energy projections are like economic forecasts.

They will happen until they don't. Contrary to predictions, the wind did not blow much this year. David Blackman writing on Forbes, opined that 'the energy crisis in Western Europe this summer has been brought on by premature retirements of hundreds of coal and gas power plants in favour of massive over reliance on wind power and to a lesser extent, solar.' Other factors trailed in tow. The reopening of the airline travel. Shortages of gas stocks in Europe. Sudden switches from gas to oil utility accounting to these shortages.

The speculative instinct of the market ran rampant and the leveraging on these vulnerabilities became inevitable. Opec did not increase production to meet the sudden demand. To be exact, they could not.

No more spare capacity is left outside the individual capacities of Russia, Saudi Arabia and the UAE, respectively, even then, to varying extents.

The shale producers for their part, have restrained their proclivity to increase production on demand, and are holding steady on current levels of extraction.

In spite of all these pressures, the Biden administration has walked back on their commitment to release 60 million barrels from the Strategic Petroleum Reserves (SPR) and the banning of crude oil imports.

To answer the question, is a $100 barrel possible, history has a lot of things to say.

Predictions aside, the movement of prices up to and beyond a $100 line has happened many times since the index spike of March 2008. The elasticity of these prices between contago (a situation where the futures price of a commodity is higher than the spot price) and backwardation (when the current price of an underlying asset is higher than prices trading in the futures market) has been caused by the same factors, which today are threatening to reach a psychological $100 barrier feared by all consumers.

These include severe winters. Restrained supply. SPR indecision. Inadequacy of shale oil and gas complementary production.

Sanctions on Iran and suppression of Venezuelan extraction and supply. Add to that the liquidity overhang resulting from a massive Federal Reserve quantitative easing.

South Africa has urgent priorities to attend to, if it can summon the courage. It needs to recognise that the road to being an economic basket case passes through a complete reliance on imports.

The proposition is to have a policy framework that would encourage the production of alternative fuels, which would have a duality of advantages. Produced from local resources, they would equally contribute towards the country's commitments to the reduction of carbon emissions.

Trucks, buses and trains, including all tractors, lawn mowers and golf facilities, can benefit from legislation that determines such a conversion. The investment capital required to establish such facilities must be incentivised by very specific policy dictates.

Our energy crisis is predictable and well nigh.

The political hurricane moment will occur when high oil prices meet an indecisive policy framework and a government in hiding, leaving millions of people to fashion their own momentary responses deep from a well of destitution and political agitation.

* Ambassador Bheki Gila is a Barrister-at-Law.

** The views expressed here are not necessarily those of the DFA.

– BUSINESS REPORT