The Effect of Oil Price Changes on Oil Producers in South Africa

THE EFFECT OF OIL PRICE CHANGES ON OIL PRODUCERS IN SOUTH AFRICA

ABEL B.S. GAIYA

There is a wide perception that South Africa does not produce oil. This perception is met by the fact that South Africa has produced oil since 1997. Globally, the crude oil market’s supply side is composed of production from both non-OPEC and OPEC producing countries, with economic, geopolitical, and political factors influencing production decisions (Farrell, Kahn & Visser, 2001). It is important to assess how crude oil price affects oil producers in South Africa – especially as it is determined internationally and affected by a variety of factors, as aforementioned. The essay begins by giving a brief description of the South African oil industry, and then proceeds to explain the import-export dynamics of oil as they relate to oil demand and consumption.

According to the Centre for Policy and Regulation (2011), only small deposits of conventional natural gas and oil are possessed by South Africa. As the Centre for Policy and Regulation notes, close to 70 percent of the country’s liquid fuels demand is met by imports of crude oil and finished products, while the balance (approximately192 000 bbl/d) is satisfied by local production of synthetic fuels from coal and gas. The industry is divided into three categories, with the upstream segment dominated by exploration and production activities. Currently, there are fourteen offshore operators spread over 16 concessions and seven applications for offshore gas exploration rights (Centre for Policy and Regulation, 2011). This segment of the industry is largely dominated by the Petroleum Oil and Gas Corporation of South Africa (Pty) Limited (PetroSA), a government-owned company. According to the Department of Energy (2016), PetroSA was registered in January 2002 as a commercial, non-listed entity under South African law. PetroSA is engaged in two worldwide businesses: oil and gas exploration and production; and the production and marketing of synthetic fuels and petrochemicals.

South Africa is a price taker in the global oil market, as it is a minor net oil-importing country. However, the downstream domestic liquid fuels industry is subject to government regulation. Petrol and diesel prices are administered by the state, which imposes various levies and taxes, and sets retail and wholesale margins over and above a “basic fuel price”. The basic fuel price is an import parity pricing formula, which depends on the international spot price of refined oil (SAPIA, 2006).

The U.S. Energy Information Administration (2016) explains that South Africa produced 148,000 barrels per day of crude oil, NPGL and other liquids in 2014, but crude oil consumption (and hence demand) stood at about 612,000 barrels per day in the same year. South Africa’s domestic demand for crude oil significantly exceeds its domestic supply of oil. To compensate for this deficit, crude oil importation ensues. Hence, 95 percent of South Africa’s crude oil requirements are imported, and this represents a high dependence on external crude oil production to satisfy its refining needs (Wakeford, 2006). This is possibly a major reason why South Africa is vulnerable to internationally-triggered oil shocks (Wakeford, 2006), and why the price elasticity of imported crude oil in the country is inelastic – as Ziramba’s (2010) estimate of the long-run elasticity as -0.147 indicates (that is, due to the lack of domestic substitute sources). This high oil import-dependence also implies that domestic oil production would be more or less unresponsive or fairly inelastic to changes in world oil price. This expectation is corroborated if one conducts a simple econometric computation (to estimate price elasticity of supply). After correcting for non-stationarity of the data and using data on crude oil prices sourced from MacroTrends (2016), it is found that there is not a statistically significant contemporaneous impact of world oil price and South Africa’s oil supply, for the period 1994 - 2014.

Domestic oil production in South Africa is substantially below oil demand and consumption. This shortfall is a contributor to the oil import-dependence of the country. PetroSA, the dominant player in the production segment of the industry is still operating below capacity and is perhaps not large enough to be responsive to oil price changes as its supply is determined by other structural variables such as availability of finance and capacity utilization increases. This explains why South Africa’s crude oil production is invariant/inelastic to changes in the world oil prices. The U.S. Energy Information Administration (2016) has data showing that oil production is significantly below capacity, and even existing capacity is still inadequate to match demand. Hence, a long-run focus on expanding supply may manifest as inelastic response to oil price changes in the short run.

In conclusion, oil production in South Africa is substantially below oil demand and consumption. This shortfall is a contributor to the oil import-dependence of the country. PetroSA, the dominant player in the production segment of the industry is still operating below capacity and is perhaps not large enough to be responsive to oil price changes as its supply is determined by other structural variables such as availability of finance and capacity utilization increases.

References

Centre for Policy and Regulation (2011). Offshore oil and gas – industry profile. SAMZA. Retrieved from http://www.samsa.org.za/sites/samsa.org.za/files/industry_profile_-_offshore_oil_and_gas_0.pdf. Accessed on 7th April 2016.

Department of Energy, South Africa (2016). Petroleum sources. Retrieved from http://www.energy.gov.za/files/esources/petroleum/petroleum_petrosa.html. Accessed on 7th April 2016.

Energy Information Administration of the United States (2015). International Energy Statistics. Retrieved from https://www.eia.gov/cfapps/ipdbproject/iedindex3.cfm?tid=5&pid=72&aid=7&cid=SF,&syid=1994&eyid=2012&unit=TBPCD. Accessed on 7th April 2016.

Farrell, G .N, Kahn, B. & Visser, F. J. (2001). Price determination in international oil markets: Developments and prospects. South African Reserve Bank Quarterly Bulletin, No. 219. pp 69-88.

MacroTrends (2016). Crude oil price history chart. Retrieved from http://www.macrotrends.net/1369/crude-oil-price-history-chart. Accessed on 7th April 2016.

South African Petroleum Industry Association (2006). Basic fuel price formula. Retrieved from http://www.sapia.org.za/pubs/fuelprice/index.htm. Accessed on 7th April 2016.

Wakeford, J.J. (2006). The impact of oil price shocks on the South African macroeconomy: History and prospects. SARB Conference.

Ziramba, E. (2010). Price and income elasticities of crude oil import demand in South Africa: A cointegration analysis. Energy Policy, 38(12), 7844-7849.

Appendix

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