LUNGILE MASHELE: SA could gain from downstream activities linked to upstream oil and gas

Geopolitical tensions and conflicts in major oil- and gas-producing regions have resulted in supply shortages, which have caused an exponential increase in the price of oil and gas.

SA has been suffering from the effects of supply-side inflation — when the aggregate supply of goods and services in an economy decreases. This occurs due to multiple factors, but the result is always increased prices.

Due to geopolitics, Opec production cuts and refinery maintenance, there has been limited supply of oil globally while demand has remained the same, causing prices to rise. This has led to cost-push inflation — the higher price of oil as an input cost has resulted in tighter profit margins, leading retailers to increase prices.

Let’s take the price of oil and how it relates to your common garden salad. Farms are heavily reliant on oil not just for electricity but their overall energy needs. A high oil price affects tractors, irrigation and generator-backed electricity, while high gas prices affect fertiliser prices. Energy is also needed for agro-processing, transport, storage and refrigeration.

So, when the prices of cucumbers, tomatoes and onions are specifically mentioned by Stats SA as leading food inflation for the month, we need to be cognisant of all the energy inputs along the green salad value chain.

Cost-push inflation can be tempered through strategic oil stockpiling and improved efficiency in the production process. The quickest way to reduce this inflation, though, is increased oil production. But SA is a net importer of oil and gas, and hence is subject to cartel behaviour by Opec. It was production cuts and their economic effects that led to Angola leaving Opec in January.

In SA, supply-side inflation is worsened by not having significant upstream activity or refining capacity. SA is heavily reliant on other nations for oil and gas, which not only threatens our energy security but also our energy sovereignty.

South Africans could benefit immensely from the downstream activities linked to upstream oil and gas. Having domestic oil and gas means cheap fuel and electricity, and energy security, provides dollar revenues through fuel exports, reduces the balance of payments and increases the tax base.

SA’s foray into upstream activities has been slow, disappointing and mired in controversy — led largely by a well-funded and litigious anti-oil and anti-gas lobby.

As Namibia forges ahead with its oil and gas production by ensuring commercial viability — a financial investment decision is anticipated in December — SA lags behind. Namibia hopes that its oil and gas finds will reignite economic growth and shared prosperity, increase government revenue, create thousands of jobs and provide investment opportunities in retail, agriculture and hospitality. All this, in addition to the vital use of gas for the country’s electricity needs, is seen as a move towards energy sovereignty.

Namibia is expected to invest a significant portion of its oil revenue in a sovereign wealth fund, which will provide investment returns and more stability during economic downturns, and encourage long-term growth through diversified investments in different asset classes.

While it is true that Africa has historically failed to leverage its resource wealth to alleviate poverty, and that revenue generated from oil and minerals is largely siphoned off rather than being directed towards investments in its people and infrastructure, the continent continues to make discoveries and the potential remains to boost economic growth, industrialisation and infrastructure development.

As the rand-dollar exchange rate continues to be volatile amid a stubbornly high inflation rate and resultant elevated repo rate, the government will need to urgently assess its policy decisions as we head into the seventh parliament. Policy needs to align with the envisaged National Development Plan 2030 goal to “incorporate a greater share of gas in the energy mix” by investing in domestic gas fields.

This strategy capitalises on existing infrastructure, lowering costs and maximising the use of already invested capital, but implementation will demand political fortitude.

• Mashele, an energy economist, is a member of the board of the National Transmission Company of SA