Managing fuel price risks is just as important as containing inflation

MAHIKENG– Every month massive consignments are driven on land, or pumped up from beneath us to eventually fill the petrol stations’ tanks. In the not too distant future, this entire service may remain important but not as dominant is it is today. For now, trucks fueled by diesel transport petrol for other cars and trucks to consume and operate. The same truck makes sure that retailers are replished and households have competitive options at the store. Every household confronts inflation in different ways. Some survive it, others do not. Understanding the interrelationships is becoming more important than ever. 

The Monetary Policy Committee tends to underestimate the dynamics of of the Brent Crude Oil price per barrel between its quarterly meetings. In this season, Brent crude oil prices have risen at a higher rate than the strength of the South African Rand. This places upward pressure on domestic petroleum prices. As such, we are now leaning closer toward November 2018 prices— a season in which the Department of Energy intervened through a slate levy mechanism.

At a macro level, data from Statistics South Africa simply reveals that during the periods in which large fuel price volatility was evident, the subsequent months revealed higher CPI indicators. The largest contributor to the changes was actually fuel price changes more than anything else (with regard to household spending).

Another dynamic worth considering is that household spending tends to be modified by conditions of living adjustments. These adjustments tend to increase average salaries with respect to the increases in the general cost of living. A major problem is that this depends on the supply chain costs associated with household products consumed in the area. Not all regions produce milk, and not all retailers source their products locally. Just as much as the transportation costs for fuel change the prices of petroleum across regions (i.e. coastal vs inland prices).

Will public transport operators have to change their prices? Will the freight sector be under pressure to modify their price settings? Well, it depends on the nature of their contracts. One month’s change may not necessarily make that much of a dent in a longer term contract (i.e. 6-12 months). But operators and entities who have short contracts or grapple with smaller consignments— if not providing ad-hoc services, may be more exposed to the cumulative rise since the December-January dip. Unfortunately,  small businesses in industries such as construction, retail and distribution may suffer harshly if the economy of SA is not insulated from such volatility in the longer term.

For petrol based distributors, the 54c rise might seem marginal, but at scale they are looking at an overall increase from R 14/l to 16.67/l— which is a 20% increase in the monthly fuel bill when compared to how much it cost them to operate in February 2019, or a 12% increase  in fuel costs for the month of May in 2018. Will households that own cars, and public transport operators reflect this tip in the cost of living this month? Rising at double our national inflation target on a year-on-year basis is not a good thing.

It is worse when the Reserve Bank underestimates the Brent crude oil price per barrel against the recommendations of Organisation for Petroleum Exporting Countries (OPEC). OPEC recommended that the medium term prices beyond June-July 2018 would range between $70/b to $75/b or so in their Oil Outlook. When the United States raised their supply and tightened their logistics networks against the backdrop of Iranian and Venezuelan geopolitics, crude oil prices collapsed around $50-$60/b. Basing a quarterly forecast on such temporary realities, the SARB chose to relax the crude oil price assumption from the reactive high in line with the October-November high volatility scenario. Poor assumptions could impact households, and the supply chains underlying their livelihoods— in addition to producers. It could add value to our macroeconomic strategy to manage risk by overestimating it— that way there is some room to move, intervene and ensure agility. Otherwise, what are forecasts for?

*This note comes from a news note I shared with PowerFM, for their late afternoon news on the 29th April 2019. 

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