The answer to SA’s energy problems, holding all else constant and considering the complexity of climate change, is building domestic refinery capacity for crude oil, writes Bonga Makhanya.

• Get the biggest business stories emailed to you every weekday, or go to the Fin24 front page.

International trade has started to recover from the Covid-19 pandemic. The recovery in international trade in 2021 was largely due to increased commodity prices, subsiding pandemic restrictions and a strong recovery in demand due to economic stimulus packages across many economies.

However, following the Russia-Ukraine crisis, many economies worldwide are pursuing their domestic interest and creating inward-focused fiscal policies at the expense of global interests. South Africa should be no exception.

South Africa should seek to develop local capacity in strategic sectors and ensure we have self-reliant industries that are not vulnerable to geopolitical shifts and shocks, such as exchange rate fluctuations, crude oil prices, wheat production and many other strategic commodities which we import to support our key industries.

Petrol prices in South Africa have been at an all-time record high, proving to have devastating effects on consumers, but most notably on the pressure on prices across the economy.

The price of petrol and diesel has devastating effects. It adds on to South Africa’s economic woes by posing a serious threat to the price of electricity, food, transport and many other key industries. South Africa is facing rolling blackouts, famously known as load shedding, and that has devastating effects on production and output for many firms as well as SMMEs and small traders who cannot operate without electricity.

Throw in surging petrol and diesel prices, along with rolling blackouts, and we can expect a rise in not only electricity costs, which would then have massive macroeconomic inflation consequences across the South African economy. When petrol goes up, electricity goes up, and ultimately, across the board, prices go up.

Crude oil prices have dipped below $100/barrel and are trading at around $95/barrel, and have been falling from the high of $123/barrel the global economy experienced in March 2022, yet South African prices for finished petrol and diesel and products remain high.

Many analysts, energy experts, lobbyists, academics and political parties have had their fair share. Deregulation and the relaxing of tariffs may temporarily ease the burden on consumers and reduce the petrol price in the interim, but South Africa needs long-term sustainable solutions to our energy crisis.

And, simultaneously, we must invest in exploration and drilling for oil and gas discoveries that have been made on our shores. Those are the two main long-term sustainable solutions. Fossil fuel-powered transport systems are still around and will continue to be around for the foreseeable future. This is especially so for a rich fossil fuel continent like Africa and more because South Africa is facing major energy concerns in the electricity sector and a future for electric vehicles is a bleak one at the moment.

However, currently, South Africa imports all of its crude oil from OPEC countries, but mainly Saudia Arabia, Nigeria, Angola and many other crude oil producing countries. The major challenge is that South Africa now imports mainly finished petrol and diesel products and does not have local refinery capacity for crude oil. The ‘crack spread’ (difference between crude oil and the final refined diesel/petrol) is at about $55/barrel and benefits the nations from which we import these products. The price of crude oil, plus the crack spread, plus shipping and transportation, plus the taxes and markup by private players then makes up the final price consumers pay at the pump.

Suppose South Africa develops local reserves for crude oil off the coast, where discoveries have been made. In that case, we can see a reduction in final price because due to our weak foreign exchange rate, it becomes costly to import crude oil from countries with stronger currencies in OPEC. Secondly, and more urgently, when we develop local refinery capacity, we can see a reduction in the crack spread due to cheaper inputs to production and again mitigating against the volatile and weak foreign exchange reserve against OPEC countries.

We also wouldn’t have any import costs and fewer transportation costs. South Africa currently has a demand of about 720 000 barrels per day for crude oil and previously had local capacity to refine about 713 000 barrels per day through SAPREF, PetroSA, Natref, Astron, Secunda and Engen.

Today, South Africa has almost lost all its refinery capacity and we now import most of our finished petroleum and diesel products. This has devastated local job creation for communities dependent on direct and indirect job opportunities in these local refineries.

For example, Saudi Arabia developed its crude oil reserves and is leading with refinery capacity, they refine about 5 million barrels of crude oil per day both domestically and abroad in offshore investments and about 3 million barrels per day domestically. The price of Petrol in Saudi Arabia is about $0.62/litre (~R9.92/litre) compared to South Africas R26.74/litre because it has local crude oil reserves and massive domestic refinery capacity which have created economies of scale and competitive advantage opportunities for Saudi Arabia.

If South Africa can make use of its recent discoveries, it can meet its domestic demand for finished petroleum products but also position itself as an exporter of finished petrol products to the global economy boosting our trade balance and GDP. Alternatively – and more controversially in the interim – South Africa should consider buying its oil and petroleum products from Russia, as that country gives about $30 to $40 discount per barrel of crude oil.

Currently, India and China have taken advantage of these discounts and have a petrol price per litre of $1.32/litre and and $1.39/litre respectively, which translates to roughly about R21/litre and R22.24/litre. This would be an instant relief for consumers and South Africas ailing economy, but again, not only do these nations get cheap crude oil from Russia, they also have domestic refinery capacity – India refines about 5 million barrels per day.

There were strong talks between South Africa and Saudi Arabia through their respective SOEs, The Central Energy Fund and Aramco, to have a $10 billion investment in a 300 000-barrels-per-day local refinery in Richards Bay, which could see it come on-stream by 2028. Such investments as well as many other projects in the upstream oil and gas sector are what is needed to fundamentally deal with the surging petrol prices and South Africa’s long-term economic woes.

Bonga Makhanya is the executive chair of the South African Youth Economic Council. Views are his own. 

SOURCE:

OPINION | SA should build local refinery capacity to avoid further economic meltdown | Fin24 (news24.com)