South Africa is heading for an economic shock if surging global oil prices persist, but ordinary South Africans are advised not to panic.
This is the message from Efficient Group chief economist and director Dawie Roodt, who warned the country remains heavily dependent on imported fuel and is vulnerable to global supply disruptions.
Oil prices have surged over the past two weeks amid escalating conflict involving Iran, which is sending shockwaves through global markets.
This is because the conflict is disrupting shipping through the Strait of Hormuz, which is a key global trade route that carries roughly one-fifth of the world’s oil supply.
For South Africa, the implications could be serious. In a recent interview, Roodt said the key issue is not just how high oil prices climb, but how long they remain elevated.
“Of course, it’s not only oil. It’s the exchange rate of the rand as well, and some other things like, for example, fertiliser prices will go up as well,” he said.
“But the real question here is not really the level of the oil price. If we only talk about the oil price, it’s the question of how long it’s going to remain high.”
Even if oil prices started to decline, he warned that a temporary spike would still deliver a shock to the local economy. However, a prolonged period of elevated prices would significantly worsen the situation.
“As it is, there will be a shock to the South African economy, even if it goes back to $70 now, for instance,” Roodt said.
“But the longer it stays above $100 and the longer it stays above $120 or maybe even eventually reaches $150, the more severe the impact will be on the South African economy.”
South Africa is particularly exposed because it imports roughly 90% of its oil needs, leaving it vulnerable to global supply disruptions and price spikes.
He added that industry players are already warning about sharp increases in the cost of fuel and other commodities.
“I’m talking to some people in the industry, and they’re talking about the obvious significant increase in the price of petrol and diesel. More concerning, however, is the possibility of supply shortages,” he said.
“They’re also talking about the possibility of shortages. So if we simply run out of diesel, for instance, then that is going to be a significant problem as well.”
Don’t panic
Diesel is particularly sensitive to price shocks because it feeds directly into several critical parts of the economy.
South Africa’s heavy reliance on road transport further compounds the issue. “We put a lot of stuff on the roads, and it’s also very important in agriculture,” he said.
As a result, higher diesel costs quickly become embedded in the cost structures of key industries.
“Once it becomes part of the cost structure of those industries, it tends to sort of linger around the price increases,” Roodt said.
The knock-on effects will likely be felt across the broader economy, particularly through rising inflation.
Roodt estimated that the impact on consumer prices will take a few months to materialise. “It probably will take about two months or so, but then we’re going to see a significant impact on various prices,” he said.
Inflation is currently running at about 3.5%, but that could soon rise. “If the oil price remains at $100 for another month, for instance, in two months we’re going to see inflation at about 4% or even higher.”
This would also affect monetary policy, likely halting any plans for interest rate cuts.
“I’m very sure they’re not going to cut rates. Previously, I thought that the Reserve Bank would cut by two times 25 basis points this year. They’re not going to do that,” Roodt said.
The broader economic outlook would also deteriorate, undermining government growth forecasts and fiscal plans.
“With the oil price where it is now, with the possibility of an increase in interest rates, we’re not going to see the 1.6% economic growth that the Minister of Finance had in his budget,” Roodt said.
“That means that the deficit and the debt numbers are all going to move in the wrong direction.”
He added that any hopes of a sovereign credit rating upgrade in the near term are now effectively off the table.
“Two weeks ago, I thought that the fiscal accounts would stabilise. I think the Minister of Finance had a reasonable budget, but now I’m not so sure anymore,” Roodt said.
“I’m really battling to find a bit of a silver lining here,” he said. However, for ordinary South Africans, his advice is not to panic.
“Don’t start overreacting here. Get a good financial advisor, stick to your plans,” Roodt said.
He emphasised that financial markets are inherently volatile. “Remember, the financial markets do this all the time. They go down, and they go up all the time,” he said.
