The ongoing conflict in the Middle East is causing significant disruptions in global oil markets, leading to soaring fuel prices in South Africa. Airlines are raising ticket prices, and consumers are bracing for record fuel hikes as the South African Reserve Bank faces tough decisions amid rising inflation.
Image: AFP
The conflict taking place in the Middle East between Iran, Israel and the US placed global oil markets in turmoil and in South Africa, the effects are already being felt by consumers, with a lot worse to come.
Already, Airlines such as FlySafair and SAA have increased ticket prices for customers to contend with the spikes in fuel prices and energy supply issues stemming from the war.
Adding to this, there have been predictions of a record high fuel price increase at the beginning of April for South Africans.
Rubbing further salt into the wounds for consumers, the South African Reserve Bank's (Sarb's) Monetary Policy Committee (MPC) are also due to meet at the end of March, with economists predicting that issues from the geopolitical tensions will result in no cut to the country's repurchase rate (repo rate) which determines the prime lending rate.
South Africa’s lack of jet fuel refinery capacity and the absence of a contingency plan for supply interruptions have come into sharp focus after low-cost carrier FlySafair introduced a temporary fuel surcharge from March 12 to May 12.
The airline said the surcharge is intended to cushion it from the impact of rising fuel prices since hostilities began between the United States and Iran, which have created uncertainty around fuel supplies from the Middle East.
Global oil markets are facing an unprecedented supply disruption, with millions of barrels of crude and refined fuels suddenly cut off from international markets following the outbreak of war in the Middle East.
The International Energy Agency's (IEA) report for March
released on Thursday, the Paris-based energy watchdog said the conflict has triggered the largest supply shock in the history of the global oil market, primarily due to the near-collapse of tanker traffic through the vital Strait of Hormuz.
Before the outbreak of hostilities, roughly 20 million barrels per day (mb/d) of crude oil and petroleum products passed through the narrow waterway linking the Persian Gulf with global markets. But since the conflict escalated, flows have plunged to a trickle, leaving producers with limited options to move oil and forcing widespread production cuts.
Annabel Bishop, Chief Economist at Investec said that the MPC is no longer expected to cut the repo rate, despite it being previously forecast.
"Given the start of the US/Iran/Israeli war at the end of February, if the oil price runs between $85/bbl and $90/bbl for the remainder of this year, it would drive CPI inflation above 4.0% y/y by Q4.26, exceeding the Sarb’s 2-4% y/y tolerance band around its 3.0% y/y target. With uncertainty high, the Sarb is likely to be cautious, and delay a change in interest rates, although long-term (out to 2028 / 2029) the SARB still likely remains in an interest rate cutting cycle," Bishop said.
"Currently, the rand is -2.5% weaker on a trade-weighted basis, while shipping costs have risen, pushing up fertilizer costs as well as oil prices, and consequently a food price shock globally has now become a concern as well. The risks for inflation are skewed to the upside, and food a key component of the CPI basket. Supply constraints for oil shipping (exports) are the main drivers of higher oil prices, despite production increases," the Investec economist added.
"The Sarb is likely to revise up its inflation rate forecasts at this month’s MPC if recently higher oil prices and rand weakness persists, with the previous MPC meeting showing an oil price assumption of $65/bbl for this year and the next two. A price shock, from oil, food or both, would likely be looked through by the MPC if short-lived, and without second round effects flowing into other prices, leaving interest rates unchanged," Bishop added.
"The MPC will watch to see if the impact of higher oil prices on inflation is temporary, or is embedded (becomes permanent), changing interest rates to prevent a more permanent move away from the 3.0% y/y inflation target. Uncertainty has lifted substantially, financial markets have become risk off, and the oil price has risen above $85/bbl. We would not expect a hike in the repo rate this month as it is too premature to estimate oil price effects," she added.
Debt Rescue CEO Neil Roets said the possibility of the largest petrol price increase in South Africa’s history could not have come at a worse time for financially strained consumers.
“South Africans are already battling with rising living costs, high interest rates and stagnant income growth. The prospect of petrol jumping by several rand per litre places enormous additional pressure on household budgets that are already stretched to the limit,” he said.
Roets added that the warning for motorists to brace themselves for major strain on their pockets highlighted the difficult financial reality facing many households.
“For millions of consumers, fuel is not just another expense. It affects how people get to work, transport their children, and ultimately the price of food and goods. When fuel prices rise sharply, it pushes up the cost of living across the entire economy,” Roets said.
He also pointed out that motorists will be hit by additional fuel taxes from April 1, adding further pressure.
“South Africans also have an added stressor in the equation, with fuel tax hikes coming into effect in April, adding another 21 cents per litre to the price of fuel. At a time when households are already cutting back on essentials, even small increases compound the strain.”
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