Plunging crude oil price not all good news for SA

17 January 2016 - 02:00 By BRENDAN PEACOCK
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Two oil workers approach the installation during the opening ceremony of Majnoon oil field, east of Basra, Iraq. Opec producers have no plans to squeeze output as the oil price takes a nosedive to a price per barrel last seen a decade ago and new players enter the market
Two oil workers approach the installation during the opening ceremony of Majnoon oil field, east of Basra, Iraq. Opec producers have no plans to squeeze output as the oil price takes a nosedive to a price per barrel last seen a decade ago and new players enter the market
Image: EPA

This week the price of crude oil dipped below $30 a barrel - a price last seen over a decade ago - but the long-standing powerhouse of production, Opec, which produces a third of the world's crude, has no plans to cut production even as new players enter or re-enter the global market.

"Opec is trying to wipe out the US and Russian oil industries. We're getting to price levels that are below the costs of production for many oil supply sources and as a result I wouldn't expect oil prices to remain this low for any length of time," said Econometrix chief economist Azar Jammine.

The price of Brent crude has fallen by some 70% in just over a year as the global supply glut continues to languish in storage.

Global demand is not picking up, and with Iran poised to re-enter the market this year after the easing of sanctions, it is anybody's guess who will blink first.

Apart from Opec's reluctance to cut output, the fuel has also been affected by the US shale industry, which also has not reduced output.

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Jammine said he expected the price of oil to remain at relatively weak levels - below $50 a barrel - for quite some time. "The average cost of production of shale oil in the US is $65, which effectively puts a ceiling on the oil price."

The US government, said Institute of Race Relations chief economist Ian Cruickshanks, was willing to let its oil industry absorb the pain for several reasons - chief among them the geopolitical desire to see Russia, which is far more dependent on its oil industry, weaker, as well as to see the US economy and consumer benefit from lower input costs.

"I think the price can go lower. As far as the US is concerned, they can produce down to $10 per barrel. That would leave nothing for new capital expenditure, but if it's a temporary measure the Americans can borrow at nominal costs because interest rates are still so low.

"They've stamped their authority on the oil price and are going to hold on to that position. I think this means lower prices for longer," Cruickshanks said.

He said the Saudi leaders were likely to be complicit in the US's moves - which would stall any Opec move to cut production - because they want to hold on to market share and keep up relations with the nation from which they buy weapons, ammunition and aircraft.

"It's been more than 10 years since Opec last pulled itself together to act.

"I can't believe they'll carry on maintaining market share at such a cost, but it could take a couple of years. New producers like Iran, Iraq and Libya are coming back to the market and looking to recapture market share. Their economic lives depend on it."

Cruickshanks said the African oil producers were being hurt.

"Do you think the US or other oil producers care? The continent contributes just under 3% of global GDP. The others will just shrug their shoulders. It's not deliberate, but it's a consequence."

The benefits a low oil price hold for South Africa pale in comparison with the downside.

Cruickshanks said oil was a leading indicator for other commodities, such as iron ore, which are important exports and have seen reduced demand, just like crude.

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"It's not just additional supply. There's no build-up in demand. No new users have been brought in to the market.

"That says a lot about the world economy and outlook. The oil price or commodity prices won't move for the sake of Africa."

Jammine said South Africa's trade with oil-producing African countries such as Nigeria, Angola and Mozambique would take a toll on the country's economy when those economies struggled.

"South Africa benefited significantly from Nigeria's rapid growth path, and that goes for the other countries as well."

He said a further dent to South Africa's outlook in this scenario was that, given the pressure on South Africa's fiscus, Finance Minister Pravin Gordhan was likely to exploit the low oil price to increase the fuel levy significantly above inflation.

"The low oil price, seen as a godsend in such times, may leave Gordhan with little option but to choose the fuel levy to increase the real tax burden rather than other forms of tax increases. Petrol prices may go up to increase government revenue."

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