More pain on the cards for long suffering SA consumers?

Source: Bloomberg and Iress

The era of low fuel prices is certainly over for South African consumers, as prices are rising fast. Fuel prices shot up earlier this month, with 93 octane petrol being hiked by 95c/L, to R17.10/L and 95 octanes increased by one rand to R17.32/L. These increases left petrol prices at an all-time high.

 

Unfortunately, there seems to be no relief in sight as fuel prices are likely to rise further in the coming months. With the global economy on the path to recovery from an unprecedented dip last year, thanks to a generous policy environment and ongoing reopening of economies, consumption of ‘black gold’ is increasing faster than what oil producers are pumping into the system. Supply is constrained by years of underinvestment in long-lead projects, now compounded by Covid-19 scarring of the oil supply chains, spending restraint, and production cuts by the OECD. The plight of SA consumers could be worsened if the rand weakens against the dollar as that would further inflate the pump price.

 

An increase in oil prices could also spill into financial markets. Given the importance of oil as an input cost, a continued rise in crude will fuel SA inflation as the CPI basket is skewed towards food which would complicate the SARB’s job, as it may be forced to hasten rate hikes. Given that a huge component of the price of fuel sold in SA is due to tax, the South African government might have to slash fuel levies to absorb some of the price increases.