Oil price plunge and what it means for SA’s economy
Prof André Roux, head of our Futures Studies programmes at USB, comments on the plunging oil price and what it means for the South African economy.
The sensational drop in the oil price to -$37 a barrel on 20 April was recorded for West Texas Intermediate (WTI) crude, the benchmark for US oil prices. This crude is usually extracted from US oil fields in Texas, Louisiana, and North Dakota. The reasons for this unprecedented state of affairs are partly of a technical nature linked to pricing in the futures market for oil, along with the collapse in demand (some 30%) in the wake of international travel restrictions and lockdowns affecting 90% of the world population. Although OPEC, along with Russia and others, recently agreed to cut production in May by 10%, supply still far outstrips demand – to such an extent that storage capacity at land and at sea is becoming more and more difficult to find.
The Brent crude oil price is the international benchmark price used by the Organisation of Petroleum Exporting Countries (OPEC). While the price of Brent has not moved into single figures, it has nonetheless fallen to its lowest price in some three decades.
In the absence of a meaningful recovery in global demand (which will depend on how the health crisis unfolds), the major producers, including OPEC, Russia and the USA will have to slash production significantly in order to support the oil price. Meanwhile, one of the world’s largest and most powerful industries faces a plethora of risks – credit risks, banking risks, and unemployment risks.
Somewhere down the road (second half of this year), we could see a sharp recovery in oil prices as demand recovers in a post-lockdown era.
For financially-stricken South Africans and producers the lower oil price comes as a welcome respite, as record declines in the petrol price are being recorded (although price decreases are being neutralised to some extent by the weak Rand exchange rate). Bear in mind that the price could rise later in the year.
The biggest loser in South Africa is arguably Sasol and its shareholders and stakeholders. Sasol’s financial position had already been pressure due to its controversial Lake Charles Chemicals Project, which has been hit by monumental cost overruns. This, together with the oil price plunge, has seen the company’s market value plummeting to some R30 billion, from a R411 billion high in 2014. In the light of its debt burden of R120 billion, Sasol will have to either sell assets and/or exercise a rights issue.
*Professor André Roux is head of the Futures Studies programmes at the University of Stellenbosch Business School (USB). He was previously Director of the Institute for Futures Research (IFR) at USB from 1996 until 2015. Prof Roux’s areas of expertise are business economics and labour economics.