Double fuel price blow warning for South Africa

An escalated Middle East conflict between Israel and Iran could punish South African motorists with huge petrol and diesel price hikes in the coming months, market watchers have warned.

Iran launched a rocket attack on Israel on 13 April in retaliation to the country’s involvement in an attack on Iran’s consulate in Damascus at the start of the month.

Israel reportedly struck back with an attempted drone attack, which Iran said caused no damage or loss of life.

The developments sparked fears that the Middle East could be dumped into its biggest conflict in five decades.

They come at a time when Israel is already experiencing heightened anger from its Pro-Palestinian neighbours.

Israel has been carrying out significant military operations in Gaza — including rocket bombardments — following a mass murder and hostage-taking spree by Hamas in October 2023.

Hamas military forces. Editorial credit: Anas-Mohammed / Shutterstock.com

In addition to a severe loss of life, a wider-scale conflict would rattle global markets, with the most significant impact being on oil prices.

According to the US Energy Administration, Iran is the world’s ninth-biggest oil producer, contributing around 4% of the world’s total production.

It is also the third-biggest producer in the OPEC oil cartel, whose decisions to limit or increase production have a big impact on oil prices.

Lipow Oil Associates recently told CNBC that the price of a barrel of Brent Crude oil could should increase to $100 after any attack on Iran’s oil production or export facilities.

For reference, the price has increased from around $75 to $87 in the year-to-date.

In addition, the potential closure of the Strait of Hormuz, a key area through which one-fifth of the world’s daily oil production moves, could push the price to between $120 and $130.

Adding to the risk is the fact that three of the other countries in the top 10 — Saudi Arabia (2nd), Iraq (6th), and Kuwait (10th) — could become involved in the war.

According to previous calculations by the World Bank, a full-scale Middle Eastern war would send the price of a barrel of oil to $150, double what it was at the start of the year.

Global oil prices have a big impact on South African fuel prices.

Even in cases where petrol is made by local refineries, they mostly rely on imported oil. Only Sasol’s synthetic petrol and diesel are made from locally extracted coal.

A worst-case increase of over 50% in the global oil price would result in a huge hike in the basic fuel price in South Africa.

The other major influencer of South African fuel prices — the value of the Rand against the US Dollar — could worsen the blow.

Currencies in developing countries like South Africa tend to suffer at times of great market instability and uncertainty.

The Rand’s value against the US dollar has already declined from around R18.82 before Iran’s rocket attack to R19.29 by the close of markets in the week after Israel’s retaliation.

South African motorists are already paying over R2.50 more at the pumps for petrol since the start of the year, while the wholesale price of 50ppm diesel has also increased by nearly R2.00.

The higher diesel price increases the cost of transporting food and goods, weighing heavily on inflation.

This could bring additional bad news for people with debt — including home and vehicle loans — as the Reserve Bank will not lower interest rates until inflation is under control.