Scorching oil to heat up current account deficit
May 16, 2008
By Ethel Hazelhurst
Johannesburg - High and rising oil prices would put "tremendous pressure on prices across the economy", Walter de Wet, the head of commodities research at Standard Bank's Corporate Investment Bank, warned yesterday.
At an African commodities summit in Johannesburg, he said US investment bank Goldman Sachs had predicted that the oil price would rise to between $150 (R1 121) and $200 a barrel in the next six to 24 months.
He pointed out that the bank's predictions often proved correct.
Goldman Sachs, a major oil trading bank, last week updated its oil price forecasts.
De Wet said there were two reasons Goldman Sachs' oil price forecasts often turned out to be correct.
One was that the bank was well informed about the oil market; the other was that its predictions could be self-fulfilling, because investors tended to follow its advice, which would put further upward pressure on the price of oil.
"They [Goldman Sachs] have a very big influence on global markets," said De Wet.
Bloomberg reported this week that crude oil futures had risen almost 30 percent this year "on steadily rising demand in the emerging economies, sluggish growth in new supply and unrest in some of the major producing nations".
There will be knock-on effects on the local economy. De Wet said rising oil prices would widen South Africa's current account deficit.
The deficit, which is equal to about 8 percent of gross domestic product, is the difference between earnings on exports of goods and services and the cost of imports.
A wider current account deficit would further weaken the rand, with inflationary consequences, he added.
However, he said there were signs that major oil consumers, such as the US and China, were starting to consume less as fuel.
The energy sector generally is experiencing upward pressure on prices.
De Wet said the effect of Monday's earthquake on Chinese coal production had already pushed the coal price up by about $4 a ton.
China's Sichuan province was hit by a 7.9 magnitude quake. Bloomberg reported this week that a total of 199 coal mines were affected.
The news agency quoted China's National Development and Reform Commission as saying the mines had total annual capacity of 14.5 million tons, compared with the 2.3 billion tons China produced last year.
De Wet said China was "a big producer of coal, but also a big consumer", exporting little, so the recent loss of coal production could make the country a net importer.
He added that the immediate effect of the higher coal prices would be beneficial to South Africa, which is a net coal exporter.
Africa had been a beneficiary of the commodities boom, said De Wet, who believed more investment funds were likely to be channelled into commodities.
He said one of the positive spin-offs of the oil price was that it had given producers in Africa an opportunity to stabilise their economies.
But he said the lack of capital markets in African countries was restricting the ability of individuals to share the additional revenues earned by firms operating in those countries.
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