Africa-Press – South-Africa. Petrol and diesel prices are set to rise in South Africa next month as the international oil price spikes due to potential disruption in supply from the Middle East.
This follows Israel carrying out waves of military strikes against Iran, raising fears of a wider war in the region that accounts for a third of global crude oil production.
Iranian oil is particularly vital for China, the world’s largest importer of the commodity, and any disruption will impact the world’s second-largest economy.
The Brent crude oil price surged by as much as 13% after the strikes, briefly surging over $78 per barrel. It has since come down slightly to $74.68 per barrel, but is still up 7.69%.
This is the biggest daily gain in the oil price since Russia’s invasion of Ukraine, which resulted in sharp increases in fuel prices around the world and significantly higher inflation.
Israeli Prime Minister Benjamin Netanyahu said the attacks targeted Tehran’s nuclear program and military, and would last until the threat was removed, Bloomberg reported.
Iran vowed to make a severe response, with Supreme Leader Ayatollah Ali Khamenei saying several commanders and scientists had been killed.
This has led to fears of a drawn-out conflict in the Middle East, which will disrupt oil supply from the Persian Gulf. However, so far, there is no evidence of Iran’s oil facilities being hit.
The rapid rise in the oil price has erased the commodity’s year-to-date losses on the back of elevated global trade tensions and anticipated slower economic growth.
The Organisation for Petroleum Exporting Countries (OPEC) had also increased the output of its members at a faster-than-expected rate.
JPMorgan Chase warned that the oil price could reach as high as $130 in a worst-case scenario, nearly double current levels.
A sustained rise in fuel prices is likely to result in higher global inflation. Highly open, oil-importing countries such as South Africa may be particularly hard hit.
This will significantly complicate central banks’ efforts, including the Reserve Bank’s, to reduce the cost of borrowing through interest rate cuts.
However, the impact may be lessened somewhat by the excess capacity of OPEC, including Saudi Arabia.
This capacity could be activated to limit the effect of a protracted conflict on the oil price. Crucially, Saudi Arabia is able to export its oil through the Red Sea and avoid any disruption to shipping in the Persian Gulf.
There are fears that Iran may block the Strait of Hormuz in retaliation, limiting any exports of commodities from the Persian Gulf.
The Strait of Hormuz is a narrow waterway at the mouth of the Persian Gulf that handles about a quarter of the world’s oil trade.
Over the years, Iran has repeatedly targeted merchant ships traversing the choke point and has even threatened to block the strait in the past.
Double blow for South African motorists
Oil was not the only commodity impacted, with gold benefiting from the heightened uncertainty as investors flocked towards safe havens.
This has also impacted the rand, with uncertainty leading to a sharp selloff. So far, it has weakened by 1.47% to R17.96 per dollar.
Investors tend to dump emerging market assets in times of elevated uncertainty, moving their capital towards safe havens, such as gold, the US dollar, the Swiss franc, and the Japanese yen.
This leads to a weakening of emerging market currencies, with the rand typically being harder hit because it is seen as a proxy for developing economies.
As a result, the country’s motorists will experience a double blow, with rising oil prices and a weaker rand combining to push petrol and diesel prices higher.
These two factors influence the Basic Fuel Price, which makes up close to 70% of the price of fuel at the pump. Levies and taxes make up the rest.
Around 85% of South Africa’s goods are transported by road at some point, meaning that a sharp increase in fuel prices will lead to higher prices across the board.
Another factor pushing fuel prices higher is the inflation-linked increase to the General Fuel Levy announced by Finance Minister Enoch Godongwana in his third Budget Speech.
Godongwana said this was intended to compensate for the lost revenue from the reversed VAT hike and lower-than-expected tax receipts resulting from a deteriorating growth outlook.
On 4 June, the General Fuel Levy was increased by 16 cents per litre for petrol and by 15 cents per litre for diesel.
This results in a General Fuel Levy of R4.01 per litre for petrol at the pump and R3.85 per litre for diesel.
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