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24 Feb 2011

Mid East Crises: The risks and impact on SA oil imports

Human Sciences Research Council (HSRC)
Press Release

Growth in total oil consumption in South Africa has averaged almost 2% per annum since 1994, due to expansions in the transportation and mining sectors. This resulted in a growing dependence on external sources for domestic crude oil, amidst substantial increases in world oil prices.
 
On a global level, the oil market is the most imbalanced of all energy markets. Asia-Pacific, Europe and North America consume approximately 80%, while controlling only 10% of the world’s oil reserves. At the same time, Africa, Russia, the Middle East and South America consume 20%, while controlling 90% of the world’s remaining oil reserves.
 
South Africa’s has small deposits of oil and natural gas, and uses its large coal deposits for most of its energy needs. The country’s highly developed synthetic fuels industry produces gasoline and diesel fuels from coal and natural gas, meeting approximately 36% of the country’s liquid fuel demands. State company PetroSA and petrochemicals giant Sasol are the major players.
 
For the rest, South Africa imports large amounts of oil and some natural gas; 64% of the demand for liquid fuels is met through crude oil imports. Eighty-five per cent of these imports currently come from the Middle East, while the remaining 10% is mostly from the African region. These are two regions highly prone to geopolitical instability, as illustrated by recent events.
 
Excessive dependence on imported oil from high-risk regions makes South Africa vulnerable to both economic and national security problems. Reducing this vulnerability requires a different approach to energy security.
 
This policy brief explores the nature of South Africa’s oil-import risks and the impact on oil prices; potential government diversification strategies to diminish such risks; and the impact of such strategies on South Africa’s oil-import diversification policy.
 
The petrol price in South Africa is linked to the price of crude oil in international markets. Rising oil prices and price volatility – as currently with Brent crude passing the $100 mark for the first time since 2008 – has been shown to stifle economic activity and reduce asset values.  For South Africa, oil is the key to the country’s energy security. High oil prices are a major threat to the country’s overall energy security and lead to high direct costs to consumers.
 
There has been a gradual decrease in South Africa’s oil-import diversification index, an indicator of the number of sources from which the country imports oil from. The index reached its lowest value of 0.68 in 2007, which is an indication that the country has increased the diversity of the number of sources from which it imports crude oil supplies.
 
The extent to which import portfolio risk is reduced by diversification is dependent on the nature and extent of market and political relationships between supply sources. The risk of importing crude from particular source is defined as a function of geopolitical factors, foreign direct investments in the country’s oil sector, and the country’s membership of OPEC.
 
Imports from the Middle East carry the highest risk-weight (34.7%), followed by Africa (19.2%), South America (14.7%), Russia (10.3%), North America (10%) and Europe (5.4%). High risk-weight implies high costs and lack of consistency, a situation that can imply higher prices on oil-related products and hence high direct costs to consumers. In general we should aim for supply sources with low risk-weights.
 
Our analysis show that fluctuations in both international oil prices and in South Africa’s oil imports result in variability in the systematic risk of South Africa’s oil-import portfolio. Systematic risk affects large numbers of suppliers and the global crude oil market. This is mostly caused by events that lead to an unanticipated surge in global demand for crude oil, or the collective action of major oil-producing nations seeking to use oil supply as a strategic weapon. Such events make it difficult for oil importers to formulate strategies to ameliorate their effects, and the result is higher import prices.
 
The increase in import specific risks can be attributed to South Africa’s obtaining its crude oil imports from only two sources, the Middle East (82.2%) and African (17.5%) regions, both of which experienced oil-supply disruptions in 2004.
 
Results also indicate that while diversification of supply sources contributes to a lowering of the oil-import portfolio risks, a diversification strategy that increases supplies from relatively risky oil-producing regions of Middle East and Africa, would only serve to enhance the specific risk of South Africa’s oil imports.
 
RECOMMENDATIONS

The study recommends the following:
    •    South Africa should diversify imports from risky regions (mainly the Middle East) to the relatively less risky regions of Europe and North America in order to achieve a significant reduction in specific risk of oil imports.
    •    To ensure low import risks, South Africa needs to advance strategic partnerships and cooperation between subsidiaries of the government-owned Central Energy Fund (CEF) and private firms in the sourcing of crude oil, and also needs to establish specific bilateral relations with less risky oil suppliers (such as Russia, Europe and North America), while at the same time taking other cost factors into careful consideration.

Download and read the policy brief:

For further information, contact Dr Njeri Wabiri, Tel: +27 (0) 12 302 2035, Mobile: +27 (0) 765678132, e-mail: nwabiri@hsrc.ac.za