Cees Bruggemans: Oil price collapse to boost SA economy at least 2.5% in 2015

Sometimes we South Africans get confused about who our real global friends might be. But the bottom line of the collapse in the oil price is set to provide a timeous reminder. As independent economist Cees Bruggemans explains in this brilliant analysis, the lower oil price translates into a huge boost for South African economic prospects. Adding at least 2.5%, perhaps more to the country’s 2015 GDP growth number. Viva US Frackers, Viva. – AH

by Cees Bruggemans

As yet little has changed regarding our parliamentary confrontations (they are going to grow hotter in 2015), our Eskom electricity interruptions (they are going to become wilder) or our labour relation disruptions (the strikes of 2015 could be as crippling if not worse than this year).

So the bottom line for SA growth doesn’t look promising for 2015, considering 2014’s crippling obstacle course giving us less than 1.5% GDP growth.

But there is one very bright spot, getting brighter by the minute, lighting up our growth prospects, and that of the global economy generally. And that is oil.

The Brent oil price has now fallen by 40% in only five months, still topping $115 in late June and ending November by dipping below $70.

That’s a drop of $45, worth how much to us? A whopping lot, as it turns out.

South Africa uses some 750 000b/d of oil, split between domestic production (Sasol, Mossgas) of about 190 000b/d and 560 000b/d through the refineries. Overall, when allowing for extensive refinery down time (these old facilities require more maintenance) actual crude imported runs at about 190mb annually.

Thus the amount ‘saved’ by the country from a $45 drop in crude oil prices comes to about $8.5bn in a full year. On a GDP of $350bn, that’s about 2.5% of GDP (compared to a current account deficit earlier in the year of about 6.5% of GDP annualised).

South Africa today uses some 28 000 million litres (ml) of liquid oil products annually, up some 40% from 2000. Between June and this week, product prices have dropped so far by just short of R2/l while trade margins have been adjusted upwards.

The benefits so dispensed would amount to about R55bn (or $5bn) in a full year. That’s ‘only’ about two-thirds of the foreign exchange windfall calculated for a full year, for a reason.

The Rand has also depreciated since June, by less than 5% against the Dollar, restraining the extent of the Rand windfall. More important, the slate that calculates domestic oil product prices takes into account moving averages, thereby lagging spot prices, especially when there are volatile crude price movements.

In June, the SA slate reflected an average Brent input cost of $110. For November this was $87 (while the spot price dipped below $70…).

@alechogg But will be derailed by tax hikes in Feb next year. Trouble also is transport costs don't drop, they just stop rising.

— Syd Vianello (@Siddels1000) November 30, 2014

So part of the oil windfall has been neutralised by Rand depreciation, and the full benefit to date hasn’t come through yet because of the lagging slate.

If crude prices (and Rand) maintain present levels ($70 & R11:$), the slate will still yield further price reductions in coming months, upping the windfall gain of about R2/l so far given us through this week.

But there are voices out there that say global crude oil prices haven’t finished falling, with $60 for Brent mentioned as a possibility. The Russians fear it, the West drools about it.

For many, however, this abrupt oil price decline is just too much. Ere long the price will go up again, under pressure from changing global demand and supply pressures. And at some point they are bound to be right. But for the moment the global dynamics seem to be favouring lower rather than higher oil prices, and these may stick for longer than imagined, for their duration offering a substantial boost to the global and SA economy.

Less plausible is a material Rand appreciation further adding to the domestic purchasing power windfall of oil users. For the Dollar prospects appear just too strong to hope for much more Rand gains. Instead, a neutral Rand assumption at 11:$ for the Rand for the time being is already a challenging one, considering the looming start of Fed interest rate normalisation later in 2015.

Still, the benefits through next year keep piling up.

Globally, oil’s unfolding collapse is creating a major inflation undershoot, tempering central bank intentions, indeed in many cases firing up easing bias. The purchasing power improvement, along with central bank easing (or holding back) is boosting growth prospects, in turn feeding into business confidence.

These are powerful positive loops underwriting stronger revival than expected.

Locally, if the full SA slate benefit of the oil price decline to date comes through in early 2015, it could increase the domestic purchasing power gain from the $5bn so far absorbed to even $8bn (in a full year).

In addition, Brent oil may not yet have finished falling, but may only do so at around $60. If so, the oil windfall could still be extended, taking the full domestic purchasing power gain to possibly $10bn in a full year (amounting to a nearly 3% of GDP boost to the economy) and the foreign exchange gain nearly halving our annualised current account deficit of earlier this year, ceteris paribus?).

These are whoppers of numbers.

It could change our 2015 growth trajectory for the better, even with more labour strikes and Eskom electricity interruptions?

There is one more hurdle to take, in the person of the Minister of Finance. He must be sorely tempted to confiscate a very large portion of this gratuitous, serendipitous global oil windfall coming to us, courtesy of the American shale fracking revolution, backpedalling Chinese consumers and businesses, warlike Russians and others upsetting geopolitical apple-carts inviting retribution, and a Saudi oil swing producer prepared to take out global high-cost marginals for the long pull.

If so, such SA budgetary upsets in February would merely be a different way of utilizing the incoming windfall, by allowing political moves (side-stepping etolling?) and other unpopular decisions (rather not jacking VAT and the top marginal income tax rate)? None of this set in granite, though.

So the overall national benefit is not in question. She is very real. What we will be arguing about shortly is the precise mix by which she will be distributed. Do not assume we have full knowledge yet on this complex score. Many hungry mouths will want to participate in all this unexpected happiness.

How much it will boost SA growth in the end will remain to be seen. But it should also improve our national standing in terms of credit risk ratings. Not a small benefit either, though perhaps more difficult to visualize.

Overall it could boost business confidence. That would be the real humdinger boosting our national fortune in the short-term.
So smile, for 2015 is about to burst upon us.

Cees Bruggemans is the Consulting Economist at Bruggemans & Associates; Website  www.bruggemans.co.za; Email: economics@bruggemans.co.za; Twitter @ceesbruggemans

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