Attack on Iran already hits oil prices

Although the long-term consequences of the US and Israeli attacks on Iran are still unclear, there is no doubt it will push fuel prices higher in the short term.

By Michelle van der Spuy, senior journalist at African Farming and Landbouweekblad

The Department of Minerals and Petroleum Resources announced on Monday, 2 March, that both grades of petrol will increase by 20c per litre from Wednesday, 4 March, while diesel with 0,05% sulphur and 0,005% sulphur will rise by 62c and 65c per litre respectively.

Dr Ernst van Biljon, senior lecturer at the IMM Graduate School, says that aside from the attack causing the price of oil to rise by almost 10%, the biggest immediate bottleneck is the Strait of Hormuz, through which about a fifth of the world’s crude oil is usually transported.

“Even the possibility of disruption, whether through direct conflict, retaliatory actions or stricter sanctions, poses a serious risk to oil and shipping markets.”

Shipping companies are currently avoiding the Strait of Hormuz due to uncertainty about further attacks with cargoes currently diverted via the Port of Cape Town.

In addition to the potential of rising shipping costs, the situation creates further uncertainty for international supply chains that are still trying to recover after the pandemic disruptions and instability in shipping via the Red Sea.

“Industries that are energy-intensive will feel the impact first. Manufacturing costs will rise. Air and sea transport will become more expensive. Food systems, which rely on fuel for fertiliser production, mechanised agriculture and transport, will also come under inflationary pressure. Central banks, many of which have considered cutting interest rates, will delay doing so, for now, if oil-driven inflation continues.”

Van Biljon says the conflict’s consequences for South Africa come at a time when it seems conditions might start improving.

“Since South Africa is a net importer of crude oil and our interest rates are already high, the country is very exposed to price shocks. A 10% increase in oil prices quickly leads to higher fuel prices, which puts pressure on transport costs, food inflation and ultimately consumers.”

Dawie Maree, FNB’s head of agricultural information and marketing, predicts the oil price will be very volatile in the short term and will depend on whether further attacks occur.

“According to current reports, there is no damage to any oil infrastructure. If it is damaged in further attacks, it could have an impact on the oil price.”

Maree says there is a possibility that the oil price, which has already reached $80 per barrel, could rise to $100 per barrel. However, this will depend on what happens next, such as whether the attack escalates into a protracted war.

“I doubt that will be the case.”

Meanwhile, the rand–dollar exchange rate weakened to R16,08 against the dollar over the weekend.

“This is a bit of good news, but there will undoubtedly be fuel price increases this week and probably also in April.”

Also read: Effective logistics are the heart of an effective agricultural export strategy

Exports

According to Van Biljon, sectors that rely on exports will also not be immune to the impact of higher fuel prices.

“While exporters of some commodities may benefit from price volatility, higher shipping and insurance costs will put pressure on profit margins.”

Dr Frikkie Maré, CEO of the national Red Meat Producers Organisation (RPO), says that although the Middle East is an important market for South African meat, less meat has already been exported there due to the outbreak of Rift Valley fever in the Northern Cape last year.

He says the situation is still very unclear and there must first be certainty about the impact of the attack before comment can be made on the possible consequences for the local meat industry.

According to him, there is an immediate shock in the system due to uncertainty when something like this happens.

“I expect there will be a negative impact on carcass prices in the next week or two, as exports will be temporarily suspended. However, we will have to wait and see what the actual impact will be.”