Oil price plunge is good news for fuel, food price

2012-06-23 10:11

The crude oil price hit a nine-month low this week when it plunged below the $100 a barrel level to reach $78 a barrel, igniting hope among hard-hit consumers that respite against high prices might be close.

The crude price raised alarm in May when it moved beyond $100 to peak at $110, raising fears that this would lead to increased inflation.

Consumers have this year had to bear the brunt of rising prices in several sectors, linked to the rising price of oil and a weakening rand.

But experts have warned it is too soon to celebrate as this sharp decline in the oil price is a symptom of a softening global economy, particularly in the eurozone and China.

Ordinarily the weakening of the rand against the dollar tends to push up the cost of importing crude oil and also increases the price of petrol and diesel, but the impact this time has been mitigated by the huge drop in international oil prices.

Since that high of $110 in May the price has been plunging.

A weaker rand will boost industrial exports and the earnings of mining companies whose profits are under pressure because of falling commodity prices.

Reports from the US this week indicate that inventories of crude oil had increased to 387.3 million barrels in the week ending June 15 – the highest level since July 1990.

Chief economist at the Industrial Development Corporation, Lumkile Mondi, told City Press this week that “this is a difficult one and we are dependent on what the US currency does. Overall we would like to see prices come down.

“But the outlook seems to indicate that it is tough times now for at least three years.”

He added: “This is no time to rejoice. We have to restructure the South African and global economy in the long-term.”

Kabelo Masike, a senior economist at Eskom Treasury, said that “as oil is an industrial growth component, a decline in the price of oil is important for us. It will have a mitigating impact on transport costs and overall inflation will be contained”.

He said it was a glimmer of positive news for businesses and consumers.

The department of energy is expected to make an announcement on Friday and a drop in the petrol price is expected. This will ease food inflation levels and pressure on interest rates.

The Reserve Bank’s monetary policy committee will meet in the middle of July to signal its next move on interest rates. Analysts say there is scope to cut interest rates to ease the pain that South Africans are experiencing.

According to the latest statistics released by Stats SA, the consumer price index for urban areas in May was at 5.7%. This was 0.4% lower than the corresponding annual rate of 6.1% in April.

The food and non-alcoholic beverages index places inflation at 6.6% as of May – down from a high of 8.7% in April.

A rise in fuel prices drives up the cost of transporting food and other input costs. Like a tide that raises all ships, food prices go up when the price of crude rises.

The transport index shows transportation costs increased by 0.1% between April and May because of the increase of 28c per litre of petrol during this period.

Inflation in South Africa is at 5.7% – still within the South African Reserve Bank’s target band of 3% to 6%.

Brent crude futures continued to decline and stood at $88.64 a barrel on London’s ICE Futures exchange at the close of this week. At the time of going to press the rand was trading at around R8.23 to the US dollar.

The reason given by analysts for the glut in the oil markets is that the European debt crisis has caused demand to weaken, leaving oil wells full and inventories overflowing.

South Africa’s trade balance is now deteriorating due to adverse economic conditions in the eurozone. Europe is still South Africa’s main trading partner and exports to Europe have taken a knock.

The Reserve Bank issued figures this week that reveal that South Africa’s current account deficit is beginning to widen – increasing to 4.9% of GDP in the first quarter of 2012.

The Chinese economy is slowing too. Chinese manufacturing has been shrinking for eight straight months, resulting in further easing of oil demand.

The HSBC flash purchasing manager index showed that China’s industrial activity fell to a seven-month low of 48.1 in June from 48.4 in May.

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