Few things impact people’s everyday existence like oil
THERE ARE FEW commodities that have as fundamental an impact on people’s everyday existence as oil. Sure, wheat is pretty important. But most of the others are largely forgettable: the gold price is a fascinating barometer of global risk, but doesn’t really hit people’s pockets in the same way as oil. Equally, platinum obviously has a major impact on the car market, but its price isn't exactly going to be felt as visibly on the streets of Durban or Soweto.
Oil is different. For starters, it’s a big driver of inflation (currently at 7% in SA), and it feeds directly into taxi fares and petrol prices. This is then factored into the price you pay for everything — from the fancy Banting-style cauliflower curry at the local Woolworths to the bread on the shelves at Shoprite.
So, in theory, the oil price collapse — 65% in less than two years in dollar terms — should have been a giant fillip for the world economy. Surprisingly, it hasn’t worked out like that.
The International Monetary Fund (IMF) says in recently published research that it, too, is mystified as to why the global economy hasn’t got a kick-start from the falling oil price.
“This outcome has puzzled many observers, including us at the IMF, who had believed oil-price declines would be a net plus for the world economy,” it says.
The answer is complicated, it seems, but includes the fact that slowing demand for oil is at least partly to blame, and that central banks have already slashed interest rates to rock bottom. One implication of this research is that perhaps there is less need to worry that the oil price has recovered from its $27/barrel low earlier this year to around $40. Still, predicting the oil price is a mug’s game: no sooner has a confident report come out declaring oil to have “passed its low” than it tumbles back.
This rollercoaster has had a rather nasty impact on a blue-chip South African bellwether, Sasol. As seasoned journalist Stafford Thomas charts in this month’s cover story, barely two years ago Sasol was looking invincible, as it forged ahead with plans to build an $8.9bn plant in Louisiana in the US.
Then the oil price fell, and Sasol lost 40% of its value. It’s no surprise, of course: Sasol’s stock has shown a 73% correlation to the rand oil price.
Perhaps mercifully for Sasol, the rand’s parlous performance against the dollar has helped soften the effects of the oil slump. (Unique among SA corporates, Sasol has perhaps the only reason to thank Jacob Zuma for firing Nhlanhla Nene, causing the rand to tank.)
In his well-argued analysis, Thomas weighs up the pros and cons of investing in Sasol right now, given the oil price uncertainties. On balance, it seems, the odds are tipping back in Sasol’s favour.