(Photo: Reserve Bank/X)
The sharp rise in international oil prices after last weekend’s attacks by the USA and Israel on Iran and Iran’s subsequent attacks on targets in various countries in the Middle East will work through to the South African economy – mainly through the negative impact of higher fuel prices, warns the independent economist Elize Kruger.
This comes against the backdrop of the first rise in local fuel prices in months which takes effect on Wednesday. This could push up inflation, which in turn could cause the Reserve Bank to cut corners with interest rate cuts.
American and Israeli attacks on Iran triggered a chain reaction and transformed the Strait of Hormuz, the strait through which about 20% of the world’s oil supply flows, into a so-called war zone. Major shipping lines stopped operations and hundreds of vessels sought shelter in open waters, as the maritime news service gCaptain put it.
The international oil price, which has been on an upward curve since December, also fueled by protests in Iran and increasing tensions between that country and the US, rose to almost $80 per barrel. Analysts from JPMorgan and Barclays are quoted as saying that it could rise to between $100 and $130 per barrel if the conflict disrupts oil supplies for a long time.
(Graphic source: Elize Kruger, Macrobond)
Although Iran has not officially closed the Strait of Hormuz, the Joint Maritime Information Center (JMIC), an initiative established in February 2024 to provide security information to the commercial shipping industry, has raised the regional threat level to critical – its highest level. Attacks on merchant vessels unrelated to the conflict have also been reported.
Major shipping lines pulled out of the region and insurers suspended coverage. Some that are still willing to do business have drastically increased their rates, which will push up the cost of imported Brent crude.
gCaptain reported on March 2 that South Korea’s Sinokor charges about $20 per barrel to transport oil from the region to China; this compared to an average of about $2.50 last year.
Alternative export routes exist but are extremely limited. Saudi Arabia can use a pipeline to the Red Sea that carries around five million barrels per day, while the United Arab Emirates (UAE) can route a total of 1.5 million barrels per day to Fujairah.
Iraq can send crude from its northern oil fields to the Mediterranean. Other countries, including Iran, have no option but to export via the Strait of Hormuz by ship.
Kruger says higher fuel prices will push up consumer and producer inflation through the direct effect of petrol and diesel in the inflation basket. If prices remain high for a longer period, this may also have a wider secondary impact, as logistics and transport costs may rise further.
“Given the increased risk environment, the expected upward price pressure will probably delay the expected interest rate cut in South Africa. But the rise in oil prices is probably not enough to cause an interest rate increase either,” says Kruger.
The sharp rise in oil prices will reduce the trade advantage that South Africa enjoyed for most of last year. However, the weakening of the rand may be limited, as the price of gold also rose sharply as investors fled to safer assets such as gold.
Kruger points out that the rand price of oil has risen by around 29% since the beginning of this year, but still remains below the level of a year ago.
If the conflict lasts three months and fuel prices rise by a total of R2.50 per liter in April, May and June, this could push South Africa’s average consumer inflation from an expected 3.5% to around 3.8% and up to 3.9%. This would move closer to the upper bound of the 1% margin for consumer price inflation.
However, this will not completely derail the aim of lower inflation, Kruger believes; however, the impact depends on how long oil prices remain elevated.
A further negative factor is pressure on household budgets, as higher transport costs undermine spending power.
