Sanctions on Russian oil can lead to same shortage as in 1973

Sanctions on Russian oil can lead to the same oil shortage South Africa and many other countries experienced in 1973, when fuel was not only expensive, but the sale hours of fuel were also severely limited. While the US is still considering sanctions on Russian oil, the war in Ukraine has already seen oil prices rising to the highest since July 2008.

Over the weekend, Brent crude reached $139.13 per barrel before settling at $R119 per barrel on Monday afternoon. Oil prices soared in 2008 when Iran’s possible crude oil return to global markets was delayed.

ALSO READ: Petrol price: R40 per litre? Concern as Brent crude reaches $140/barrel

The 1973 oil crisis

Prof. Jannie Rossouw, visiting professor at the Wits Business School, says banning Russian oil could take us back to 1973 and the same limitations on buying fuel as we had to endure then: no fuel sales between 18:00 and 6:00 daily, no fuel sales on weekends and a speed limit of 80km/h on highways.

Fuel pump prices increased by 400% overnight in October 1973 when the Organisation of the Petroleum Exporting Countries (OPEC) was formed as a bargaining bloc to counter the influence of Western oil companies. Oil-exporting states used it for political ends and oil became a potentially dangerous weapon.

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

Rossouw says if Russian oil is sanctioned, countries will begin hoarding oil, which will make the shortage even worse and affect the world worse than the current sanctions.

“The fuel price as it stands now can stay high for a long rime and this will influence inflation globally. High inflation spells high interest rates on a global scale.”

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

Is R40 per litre waiting for us?

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

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

Rossouw says what really worries him is that the current crisis will lead to increases in inflation for all income groups, but especially the low-income groups and increase inequality even further.

The Bureau of Economic Research (BER) at Stellenbosch University also emphasises that although severe sanctions imposed on Russia have until now excluded the energy sector, the oil price continued to spike higher last week as major buyers shunned Russian oil in protest against the Ukraine invasion.

The 1-month future for Brent crude still ended the week more than 20% higher and the BER says the local impact of the extraordinary oil price gains is reflected in the daily over-recovery figures for the local petrol price from the department of minerals and energy, signalling at this stage that domestic fuel prices could increase by as much as R2/litre in April.

ALSO READ: Ukraine fallout: gold reaches 17-month high as oil price surges above $100

Get ready for more and big increases

What is even more alarming is that the BER says the increase could be significantly more depending on oil price moves in the rest of the month, following the petrol price hike of about R1.50/litre in March.

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

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

“Given the further oil price surge in recent days, the updated forecast is already outdated, with further upward revisions required if oil stays at these levels. This is especially the case as a growing list of local companies are commenting that they can no longer absorb a sustained rise in input costs and will now start to pass these on to the end consumer.”

ALSO READ: Ukraine invasion: consequences for SA

The risk of higher inflation

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

However, given rising risks of secondary price effects emerging and to anchor inflation expectations, the risk is that the Reserve Bank sees the need for a more aggressive, front-loaded hike in March although it will risk compounding the impending hit to real gross domestic product (GDP) growth.