Record oil prices pump up global inflation risks
January 4, 2008
By Ethel Hazelhurst
Johannesburg - Since the oil price went to more than $100 (R685) a barrel on Wednesday, risks that inflation will inflict further damage on the local and global economy have been rising.
Russell Lamberti, an economist at Econometrix Treasury Management, said yesterday that the local price of petrol was already at record levels, up nearly 25 percent from a year ago. If the oil price remained at present levels, it could mean a further increase in the price of petrol at South Africa's pumps next month, he said.
The impact is reflected not only in vehicle running costs, which make up more than 7 percent of the consumer basket, but it has second-round effects as producers and retailers hike prices to cover the higher costs of transport and production.
"Octane 95 unleaded petrol is now R7.47 to the litre, compared with R5.98 a year ago," Lamberti said.
The rise in the price of this critical commodity has put considerable upward pressure on inflation. Together with food prices, it has pushed growth in the benchmark CPIX (the consumer price index excluding mortgage costs) above the Reserve Bank's inflation target range ceiling of 3 percent to 6 percent. In November CPIX rose 7.9 percent.
Petrol prices are reviewed monthly and adjusted if necessary, in line with the rand value of global oil prices.
At the start of the month there was no change in the petrol price because, according to the department of mineral and energy affairs, the average under/over recovery last month came in at zero.
According to Lamberti, expectations in the first half of December were for a petrol price reduction this month, "because the oil price had retreated to about $85 to $87".
"But about mid-month we started seeing significant increases in the price," he said. "Several factors were responsible, including dollar weakness, tensions in northern Iraq and ... Iran and the fact that Nigeria is only producing about 80 percent of its normal output."
He said concern over the level of US oil inventories had added to speculative momentum. "US reserves are at their lowest level in three years."
But he said the oil price alone did not determine the inflationary impact on the domestic economy.
"The strength of the rand is also a factor; if the rand appreciates, it dampens the inflationary impetus."
The rand yesterday closed at R6.8517, somewhat stronger than levels of more than R7 to the dollar two weeks ago.
Rising inflation expectations in the light of higher oil prices could prompt the central bank's monetary policy committee to raise the official repo rate from 11 percent.
Johann Els, an economist at Old Mutual Investment Group SA, said: "It depends what price they have already built into their forecast." He said the oil price was volatile. "As much as $30 of the price reflects political risk, the rest supply and demand."
In other words, a resolution to political problems could bring a sharp fall in the price.
However, like other commodity prices, oil prices appear to be on an upward trend.
AFP yesterday reported analysts saying that oil prices had quadrupled in five years, "propelled by surging demand from Asian powerhouses India and China, geopolitical tensions and new buying interest from investment funds".
Opec is resisting pressure for more output. Bloomberg reported that on December 5, the cartel, which supplies more than 40 percent of global oil, kept its production targets unchanged.
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