MAHIKENG– A snapshot of a petrol tanker refueling the small town with some petrol. I had some discussions with the operators, after their work, and they indicated that much of the fuel is coming from Klerksdorp, North West. There is apparently a pipeline there, which would be worth visiting. Anyway, the operators said to me that these there are three 23 000 liter tanks under this one petrol station, and they have filled stations with over 50 000 liter tanks. Not a nice thing to know, safety first at the pumps please!

The Automobile Association’s announcement this afternoon, in which they estimated a decline of R 1.00 p/l for petrol and R 1.30 p/l on the basis of sagging international prices and potentially declining role of OPEC in influencing fuel prices as the US becomes a net exporter of oil. The same line of argument was published in BusinessTech, TimesLive and Wheels24 and Fin24. The AA’s estimates were close, as expected given the strengthening dollar, and underlying Basic Fuel Price attributes. This note is a bit of an expansion on what the AA announced, in which I account for the Central Energy Fund’s notes, month on month declines and the red flag that SA might not know how to handle the potential stimulus from lower fuel energy prices. We need diversified industrial capacity that can ride the wave, boost exports and increase our comparative advantage in key sectors.

Domestic developments

Let us not forget that the Minister of Energy took it upon government to contain the huge spike in fuel prices by containing the increases in October and November through the Slate Levy Mechanism and more recently there is a proposal to reduce the Basic Fuel Price structure which may decrease the base for fuel much lower in order to reflect improvements in supply chain efficiencies. According to the Central Energy Fund’s (CEF) estimates fuel prices are declining by R 1.23 (R 1.22 for 93 ULP & LRP), diesel by R 1.54, Illuminating paraffin is down by R 1.23 in my estimates, but according to the CEF it is down by R 1.64 in terms of the Single Maximum National Retail Price[1]; and LPGAS is down by R 1.32. The retail prices, more or less are indicated here in the table below, but they will vary depending on where you are in the country and the supply chain costs employed to distribute to your area.

The CEF, reveal that much of the decline is as a result of Brent Crude Oil prices dipping into the $50/b range—not that our exchange rate with the Dollar improved (contracting from R 14.09/$ to R 14.17/$). Arguably down by 20%, internationally, the average decline of 18% from November to December, and December 2018 to January 2019 in SA reflects this as well. I’ll share more detail after the policy submissions.

The importance of price stability

The global picture is not so great either. The Organization of Petroleum Exporting Countries (OPEC), which has essentially been regulating fuel prices in terms of supply and demand, and deciding how much oil countries may distribute is coming under scrutiny. In HE Mohammad Sanusi Barkindo’s speech on the 18^th December, in Angola, he highlighted how their role has been to implement a Declaration of Cooperation which has essentially been the backbone of some economic stability since the 2008 crises. At the heart of this is a need for stable prices, stable economies and durable reserves without crowding out markets, economies and countries with unequal factor endowments. For instance some economies can afford to produce large quantities of oil, refine and distribute them at a cost that is far lower than other countries which may not have equivalent reserves, but wish to participate in the global economy. In this sense the role of OPEC has been to ensure somewhat fair competitive practice. I think Jeff Mower describes these dynamics quite well in his interview with Investors.com. But I want to quote the underlying argument behind OPEC first:

“When you listen to any OPEC official speak; if you read any of our publications, statements, or press releases; if you examine our statute; you will see our core objective repeated over and over again: oil market stability on a sustainable basis. This goal drives all of our activities, all our actions and almost all our research”– HE Mohammad Sanusi Barkindo, Secretary General of OPEC, Dec, 2018

The reason behind this line of question, is because the U.S. Energy Information Administration revealed a 19.5% increase in proved reserves in 2017.  While the IMF forecasted positive growth for Iran’s budget, the Financial Times reports a fall of 3.7% partly due to US sanctions, but this may place upward pressure on taxpayers. So far, Russia has been a strong post for the non-OPEC members discussions, reinforcing the oil production cuts agreed in early December reducing overall production by 1.2mb/d^[2]— but there is reason to ask What the End of OPEC Mean as Liubov Goerges does—(she doesn’t really talk about the study on the topic though). One of the things she pulls out is that:

“U.S. producers have added a volume equivalent to the entire output of OPEC’s Nigeria in the past twelve months, reaching record high crude production at 11.7 million bpd in November. According to the Energy Information Administration, U.S. crude production could reach 12.05 million bpd in April, six months sooner than forecast in October, and reaching 12.29 million bpd in December 2019. These are the worrying statistics for OPEC, as it loses control in determining world oil prices and market share to producers in the United States. And while Russia has worked with OPEC in the past, Saudi Arabia clearly eyes Russia as an essential partner to guide world oil prices through targeted production cuts.”- Liubov Georges, December 13, 2018.

Looking for a red flag

2019 is going to be a complicated year, and all the chess pieces will be moving faster than ever before. While I suspect that global growth my actually increase due to the lower cost of lubrication, it is going to be tough to observe how costs are driven down by fuel prices, and which economies will fair better than others in the process. For SA, a stronger dollar due to the combined effect of increasing revenues from crude oil, and liquid gas, are key threats to the Rand. Lower fuel prices should mean lower costs of inputs at the beginning of the year into mid-2019 where OPEC may change it’s position, and the Department of Energy’s policy proposal takes into effect. In any case, the economic boost will not go unnoticed and freight transport operators and consumers may well be significant beneficiaries[3]. The biggest red-flag is the extent to which the SA economy is geared to absorb the true value of the lower input costs of transport (into the medium term). Specific reference needs to be made to rail and road competition– lower fuel prices might be good for an economy oriented around road freight transport, but it does not provide the capacity security that is needed to insure a dense intermodal supply chain, that is usually based on rail, road and aviation.

[1] Not sure why this difference exists for now, I’ll do some checking. Maybe the data capturing is not okay, or there is a mark-up to reflect a maximum price ceiling which is about 41c higher than the price.

[2] Mb/d: million barrels per day.

[3] I’m still investigating the lag effects, anyone with insights on the topic please share.