Business Tech World

Sanctions on Russian oil could lead to the same deficit as in 1973

Sanctions on Russian oil could lead to the same oil shortage in South Africa and many other countries in 1973, when fuel was not only expensive, but fuel sales hours were severely limited. While the US continues to consider sanctions against Russian oil, the war in Ukraine has already sent oil prices soaring to their highest levels since July 2008.

Over the weekend, Brent crude reached $139.13 a barrel before settling at $119 a barrel Monday afternoon. Oil prices rose in 2008 as Iran’s possible return of crude oil to world markets was delayed.

ALSO READ: Petrol price: R40 per litre? Concerns About Brent Oil Reaching $140 A Barrel

The 1973 oil crisis

Prof. dr. Jannie Rossouw, visiting professor at Wits Business School, says banning Russian oil could take us back to 1973 and the same restrictions on buying fuel as then: no fuel sales between 6:00 PM and 6:00 AM, no fuel sales in the weekend and a speed limit of 80 km/h on highways.

Fuel pump prices rose 400% overnight in October 1973, when the Organization of the Petroleum Exporting Countries (OPEC) was established as a negotiating bloc to counter the influence of Western oil companies. Oil-exporting states used it for political purposes and oil became a potentially dangerous weapon.

The oil crisis began in 1973 when Arab members of OPEC, along with Egypt, Syria and Tunisia, imposed an embargo to protest the West’s support of Israel in the Yom Kippur War. They raised the price of crude oil by 70%, cut production and imposed an embargo on oil exports to the US, UK, Netherlands, Japan and South Africa.

Rossouw says that if Russian oil is sanctioned, countries will start hoarding oil, which will make the deficit worse and make the world worse than the current sanctions.

“The fuel price as it stands could remain high for a long time and this will affect inflation worldwide. High inflation leads to high interest rates on a global scale.”

ALSO READ: Fuel price latest: Brent crude above $110 a barrel and climbing

Is R40 per liter waiting for us?

He says the fuel price of R40 per liter is not as unlikely as we would like to think.

“Last week we were talking about a possible increase to R25 per liter and now we are talking about R40. The fuel price will depend on how strong the rim is,” he says.

What really worries him, according to Rossouw, is that the current crisis will lead to a rise in inflation for all income groups, but especially for the low income groups and that inequality will increase even further.

The Bureau of Economic Research (BER) at Stellenbosch University also emphasizes that while tough sanctions against Russia have so far ruled out the energy sector, the price of oil continued to rise last week as major buyers eschewed Russian oil in protest at the invasion of Ukraine.

The 1-month future for Brent oil still finished the week more than 20% higher, and the BER says the local impact of the extraordinary oil price increases is reflected in the mineral and energy department’s daily over-recovery figures for local gasoline prices, suggesting that indicates at this stage that domestic fuel prices could rise by as much as R2/litre in April.

ALSO READ: Ukraine Fallout: Gold hits 17-month high, oil price rises above $100

Get ready for more and big increases

More alarmingly, the BER says the increase could be significantly stronger, depending on oil price movements in the rest of the month, following the rise in gasoline prices of around R1.50/litre in March.

Weekend reports of active discussions between the US and its European partners over a ban on Russian oil imports propelled oil prices even higher in Asian trade Monday morning, with Brent oil trading just under $130, another 8.5. % starting Friday.

The BER says that while rising prices of export commodities protect South Africa’s terms of trade from much higher oil prices, the country will not escape the inflationary impact. In January, the BER forecast that overall CPI would average 5% in 2022, revised to 5.5%.

“Given the continued rise in oil prices in recent days, the updated forecast is already outdated, with further upward revisions needed if oil remains at these levels. This is especially the case as a growing list of local businesses find that they can no longer absorb a sustained increase in input costs and are now passing it on to the final consumer.”

ALSO READ: Invasion in Ukraine: consequences for SA

The risk of higher inflation

The risk of these second-round price effects could exacerbate the direct effect of a higher fuel price on inflation. “Due to the likely adverse impact on domestic growth from higher fuel and food prices, as well as downside risks to global growth, we are not changing our forecast for the time being that the Reserve Bank will raise the repo rate by an additional 75 basis points in 2022. with the next increase of 25 basis points in March,” the BER said.

Given the mounting risks of secondary price effects and of anchoring inflation expectations, there is a risk that the Reserve Bank will see the need for a more aggressive, frontal hike in March, although it risks the impending blow to the real gross domestic product (GDP growth.

Leave a Reply

Your email address will not be published. Required fields are marked *