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Low oil price benefits SA consumers, but electricity shortages still strain economy

Photo by Bloomberg

Barclays Africa markets principal Peter Worthington

29th January 2015

By: Natasha Odendaal

Creamer Media Senior Deputy Editor

  

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While South African consumers will get a reprieve on the back of a lower oil price, all the potential benefits could be overshadowed by the nation’s ongoing electricity shortages.

A surprise cut to below $50/bl for crude oil would soften the blow of rising costs on consumers and potentially save over R20-billion in disposable income, said Barclays Africa markets principal Peter Worthington on Thursday.

Speaking at a Gordon Institute of Business Science-hosted economic outlook 2015 conference, he said the collapse of the oil price had emerged at a convenient time and would have “huge implications” worldwide.

Cannon Asset Managers chief investment officer Professor Adrian Saville said that, adjusting for inflation, the oil price had hit 1982 levels this year, with panellists at the conference expecting the price in 2015 to range between $48/bl and $60/bl.

He added that Saudi oil producers have indicated that they could “pump out crude oil all the way down to $20/bl".

With the resultant fall in fuel prices, it was likely that only car owners in South Africa would benefit directly, as public transport did not pass on lower fuel price benefits to passengers, Renaissance Capital economist Dr Thabi Leoka pointed out.

However, the price of food, besides others, would start to decline, benefitting the entire country.

For all oil-importing countries, this would be a “big” boost to growth and could partially offset the impact of the softening prices of South Africa’s key commodities, such as coal and iron-ore.

It could also provide a boost for the country’s current account deficit if government seized the opportunity to administer a fuel levy to ease South Africa’s widening public debt to gross domestic product (GDP).

FNB chief economist Sizwe Nxedlana believed that the lower oil price could get South Africa a “stay of execution” on a downgrade if a 60c levy were applied to the fuel price, with the potential cash generation of about R15-billion injected into the R22-billion target to narrow the deficit.

Further, other benefits included R110-billion in import savings, as 22% of South Africa’s R1-trillion import basket was now 50% cheaper.

Nxedlana explained that, if the oil price averaged $50/bl in 2015 and $70/bl next year, the resultant improvement in household spending and a compression of the current account deficit would lead to improved GDP growth to between 2% and 2.5% in 2015 and 2016.

However, not even a lower price could “rescue” South Africa from the impact of the ongoing electricity shortages on the economy, Worthington warned.

State-owned Eskom had been battling to keep the national grid from collapse since the rolling blackouts of 2008, which had cost the nation R57-billion.

Leoka noted that, with power constraints and load shedding expected for the next ten years, the impact would cost industry and South Africa billions of rands, particularly in an industry characterised by "perennial malaise” and struggling to take off.

And while Worthington believed a total grid shutdown was unlikely, Leoka raised concerns over several unforeseen occurrences, including the collapse of a silo at Majuba, which could bring the grid closer to failure.

Edited by Creamer Media Reporter

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