Wages of war – oil, gold, rand and the SA economy

PRICE SHOCK

- 

AN 'out of stock' sign is displayed at a gas station in Manila. The price of the main US benchmark for oil surged more than 30% on March 9 over concerns that the Middle East war could create prolonged supply disruptions.

(JAM STA ROSA AFP)

THE wages of war are almost always blood and money. March this year marked an escalation of conflict in the Middle East involving Iran, the US and Israel, creating a major supply-side shock to global energy markets and triggering a “geopolitical risk premium”.

For South Africa, a net importer of oil, this translates to higher fuel prices, imported inflation, delayed interest rate relief, and increased strain on the fiscus. While the National Treasury has built some buffers, the crisis threatens to derail the recent improvement in fiscal optimism.

Energy security and oil prices

In early March, Brent crude oil surged almost 18%, due to the closure of the Strait of Hormuz, a maritime chokepoint through which roughly 20% of the world’s oil and liquefied natural gas (LNG) passes. The world’s largest LNG supplier, Qatar and other Gulf states, are seeing their supply routes paralysed. Saudi Arabia and Russia, led by OPEC+, continue to manage the market through production cuts, reducing the global supply cushion and exacerbating supply shocks, thereby driving up prices for refined products such as petrol, diesel and jet fuel.

South Africa's fuel prices are largely determined by international oil and gas prices, and the rand/ dollar exchange rate. Higher landed costs of refined fuels or a weaker rand mean petrol prices go up.

Shipping and logistics