By Saliem Fakir · 16 Mar 2011
Oil has become the bedrock of South Africa’s economy. But our economy is highly dependent on foreign imports of oil. About 60% of our transport fuel comes from overseas imports of crude, most of it from the volatile Middle East.
Recent and on-going upheavals in North Africa have had a marked effect on oil prices. Oil is now trading at just above US$120 a barrel. This is of concern because a 10% increase in the oil price can lead to a drop in GDP of as much as 0.5%.
The rest of South Africa’s fuel for transport comes from coal (made by SASOL) and a very small portion from gas made by the South African Petroleum Company (Petro-SA), which is owned by government.
Everything that has to be moved from one place to another, domestically and internationally, whether on planes, cars or ships, depends on either imported crude or SASOL’s fuel.
SASOL was privatised just before the new ANC-led government came into power. However, it is still of relevance to government, as SASOL’s role in synthetic fuel production is of national interest.
Oil and synthetic fuels are a source of many other products as well. These include plastics, fertilizers, paraffin (still widely used by the poor), bitumen used for roads and lubricants for industrial purposes.
Thus, a spike in the oil price has diverse knock-on effects, not only for transport, but also for industry and especially agriculture, which is still highly oil intensive. Nearly 70% of the world’s output of fertilizer is oil derived. Thus, the impact of oil price increases on agriculture and industry can be felt in increases in the costs of goods and services, lower salaries and job losses.
Apart from industry wide effects, oil price increases also affect other economic decisions. Regular pass through costs for electricity, water, property taxes, and adjustments to inflation rates are also influenced by the cost of fuel.
How we deal with the oil problem, has a systemic ramification for our economy.
South Africa has two economies that are linked: one very rich and the other, which holds the majority of our people, vastly poor. The poorer segments of our population simply cannot absorb any cost increases that are multiple in nature.
Thus, the world of prudent economic management becomes more complicated for decision-makers that are hoping to grow the economy and save citizens’ incomes from the ravages of inflation. Some factors are unpredictable and beyond control.
A dependence on oil holds our general economy and decisions about its future to ransom.
Whether we have peak oil or not, oil is no longer cheap and won’t be, both in the immediate and long-term future.
South Africa’s responsiveness to sudden shocks in price and scarcity is not as agile as we think. In this regard, it is relevant to ask two simple questions: What if sudden and protracted scarcity was to prevail? What would happen to the routine lives of people in South Africa and all over the world for that matter?
Most countries would not be able to cope with sudden or protracted scarcity. In South Africa, with our high levels of inequality, the poor will suffer the most -- not to speak of the highly indebted middle class whose levels of distress will grow.
Looking into the future, there is a need for sound leadership to recognise that being locked into an energy paradigm that is increasingly constraining to the economy, is a strategic risk to that economy.
Thus, how we think of new infrastructure and resource plans has to be astute.
For example, Petro-SA’s new 400,000 barrel per day refinery that is going to cost more than 15 billion Rand doesn’t sound like clever thinking. We should dispose of this idea very quickly and invest rather in alternative energy.
However, we must manage the shift with a great deal of patience and prudence because the transition to alternatives is complex.
Thus, in the interim, government should revisit the idea of a strategic oil reserve to withstand shocks in the oil market. After 1994, whatever strategic reserves South Africa had, were sold to pay our debts. Currently we are over reliant on the reserves of four oil multinationals, which they maintain for commercial reasons.
Built at good prices, a national strategic oil reserve can help lower costs and be crucial during a serious oil supply crisis.
The whole question of SASOL also needs to be reviewed. In particular, the setting of synthetic fuel costs that tag the price of crude oil. We ought to be able to blend domestic sources (if they are produced more cheaply than crude oil) with imported fuels to lower the average cost of fuel. This will help push inflation down and lower transport costs.
Consideration should also be given to a special resource tax on the fuel and mining sector that can be used to create temporary employment for the poor or support the creation of alternative livelihoods.
At the same time, South Africa needs to decisively shift away from a dependence on oil. There is no future without a radical decoupling from oil.
We should ideally shift agricultural production away from high oil dependence. Cuba offers a great example of how this can be achieved. Currently, decision makers are preoccupied with the crisis in land reform and the lack of transformation in agriculture. They need to wake up to the oil crisis that is heading our way, which will be disruptive to agriculture, the fishing industry and forestry. These are significant contributors to our GDP, holders of employment and livelihoods.
Transport and better public transport in particular represent a crucial frontier in the battle for a sustainable future. In this regard, South Africa should concentrate her energies on providing energy efficient and cost effective public transport. Publicly subsidised transport that is electrically driven may cost more to develop now, but will lower our risk to oil price shocks and scarcity in the future. This is an area that has been underinvested in for a long time.
As past electricity blackouts have shown, the disruption of economic activity tends to be greater than the initial upfront cost of investing in alternative technology and solutions.
Oil dependence is the result of an outdated political economy. Oil is one of those strategic resources the control of which is never always in our hands.
Dealing with the oil problem in the immediate future will help us learn new capabilities as well as improve how we deal with multiple strategic risks coming our way. We should take the oil challenge for what it is: a way to build a new life for all South Africans.
Excellent points. we also need to seriously look at tradable energy quotas (TEQS) as a form of equitable energy rationing as well as being a form of universal basic income to combat the effect of energy scarcity on the poor.
If we can consider investing R15 billion in a refinery, what is getting in the way of investing R10 billion in a plant to manufacture the Joule car, which can be exported (if we can keep our other costs competitive)?