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What's impacting the price of petrol

Lifestyle Section - Opinion

  You may have noticed that the petrol price dropp-ed by 69c a litre last Tuesday. If you’re a cynic, chances are you’ll be inclined to interpret this as ANC government largesse in the lead-up to the festive season, during which many people will be buying a great deal of petrol as they head off on their annual holidays. And you’d be wrong. Aside from abandoning the many excises and levies which form part of the petrol price we pay, or reducing the retailer margin (which would inevitably result in petrol attendants being paid less than the already parsimonious wage they earn), government has remarkably little wiggle room when it comes to managing the petrol price.

The remaining large influences on the petrol price, broadly speaking, are the rand/dollar exchange rate (all petroleum product prices are quoted in US dollars), the international price of refined petroleum products (we import way more refined product than we import crude oil to refine locally), and the benchmark price of crude oil.

Now, if you think about it, government has little control over the latter two, but what about the rand/dollar exchange rate?

Although this is not the forum for a debate on how our politics in the broadest sense influences currency exchange rates, let’s just accept that it can influence it far more negatively than it can positively. In other words, if the international investment community perceives that South Africa is going to hell in a hand basket economically, politically and socially, this – as you can imagine – will negatively influence investor sentiment, which in turn will result in a weakening of the Rand against the major currencies. Enough said about that, for the time being.

But what about the other two? Well, the international market price of refined petroleum products is directly affected by the international benchmark price for crude oil, which is, incidentally, the most traded commodity in dollar terms on the planet.

So, aside from movements in the rand/dollar exchange rate, the crude oil price is the single biggest influencing factor. What, in turn, influences that? Very simply put, supply and demand, and this is where it gets really interesting.

At the time of writing (last Friday), the benchmark price for Brent Crude (what is commonly referred to as “the oil price”) was USD70.87 a barrel, down from the previous day market day (USD71.89) and down from USD111.07 one year ago. This constitutes a change of -1.42% from the previous market day, and -36.19% from one year ago. Clearly crude oil prices are on the slide, but why? There was a time some 10 years ago, when it was speculated that Brent Crude could eventually top USD200 a barrel, so what happened?

The shape of the oil market changed, that’s what happened. In the intervening period, American shale oil production has spiked, and the balance of power between OPEC (Organisation of Petroleum Exporting Countries) and non-OPEC producers has shifted.

There was a time in the 1970s when OPEC had de facto control over crude prices, which it exercised by simply adjusting output, because OPEC controlled the majority of crude production.

Reducing output, particularly in high demand periods, for example the northern hemisphere winter, would result in an almost immediate increase in benchmark crude prices. Who will ever forget when OPEC truly flexed its muscles for the first time in the 1970s, when our petrol prices skyrocketed, petrol stations stayed open only Monday to Friday from 6am to 6pm, and it was illegal to carry more than 10 litres of petrol in a jerry can in your car?

OPEC has 12 members, half of which (Iran, Iraq, Kuwait, Qatar, Saudi Arabia, United Arab Emirates) are in the Middle East. The balance are in Africa (Algeria, Angola, Libya, Nigeria) and South America (Ecuador, Venezuela). OPEC now controls one third of global output, nowhere near enough to dramatically influence the oil price, since the non-OPEC countries simply ignore what OPEC says and does about its members’ production volume.

All that happens when OPEC cuts production in an attempt to influence the oil price, is hardship for those of its members, Venezuela and Iran in particular, that do not have foreign currency reserves sufficient to ride out a decline in oil revenues.

At the most recent OPEC meeting it was decided to keep production at 30 million barrels a day, despite a world oversupply of at least one million barrels a day and a crude price at a four-year low. The logic?

A declining oil price may well force some of the more expensive production facilities out of business, that have entered production because of the previous upward trajectory of the crude oil price, for example American shale oil. America is currently the third largest producer of crude oil worldwide. If that happens, then production outside of OPEC’s control may well decline. The oversupply will be gobbled up, and prices will rise again.

The OPEC bigwigs are simply saying that they’re prepared to weather the storm of lower oil prices – speculated to even go below USD60/barrel – and concomitantly lower oil revenues in return eventually for a more stable market, with the benchmark crude price at USD80/barrel.

What does that mean for the consumer? Well, as long as our socio-politcal milieu does not unduly hammer our rand/dollar exchange rate, we’ll see a gradually declining oil  and petrol price, for the foreseeable future, but inevitably, if OPEC has its way, prices will rise once more, and we’ll be back to the days when the price of a litre of petrol was heading for R15.

Enjoy it while you can.

Written by Norman McFarlane You are reading What's impacting the price of petrol articles

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