WAR, OIL AND INFLATION
Once again, global geopolitics has pushed oil prices higher. The escalating conflict involving Iran has raised fears about supply disruptions in one of the most critical energy regions in the world. Even when actual production is not immediately affected, markets react quickly to risk, and oil prices tend to move first. In this month’s Financial View, we detail why for South Africans this matters far more than it might initially seem. We import almost all of our oil, and energy prices affect everything and feed directly into inflation. A war thousands of kilometres away can very quickly translate into higher living costs at home.
As the historical oil price graph included below in this newsletter shows, periods of geopolitical stress have repeatedly led to sharp and sudden increases in oil prices. What we are experiencing now is not unprecedented, but it is still highly disruptive, especially for an economy already under pressure.
Why Oil Prices Matter So Much to South Africa
Oil is priced globally in US dollars. When tensions rise around supply by major producers or uncertainty around transport routes, traders push prices higher to reflect risk. For oil‑importing countries like South Africa, this creates an immediate problem.
Firstly, we pay more for every barrel of crude we import. Secondly, if the rand is weak at the same time, which is often the case during global uncertainty, the local impact is multiplied. Even if domestic demand is weak, fuel prices can still rise sharply. Oil is not just another commodity. It sits at the centre of the economy. When oil prices increase, the effects spread far beyond petrol stations.
Fuel Prices: The Most Visible Inflation Channel
The most direct impact is felt at the pump. Petrol and diesel price increases hit households immediately – it hits them in the pocket by reducing disposable income and making everyday life more expensive. For many people, transport is not optional. Commuting to work, taking children to school, or running small businesses all depend on fuel.
But the impact goes far beyond private motorists. Diesel costs raise the price of transporting goods across the country. Food, building materials, retail stock, and medical supplies all become more expensive to move. Over time, these higher costs are passed on to consumers.
This is why fuel price increases often lead to broader inflation, even when economic growth is weak. It is a classic example of “cost‑push” inflation, where prices rise not because people are spending more, but because it costs more to produce and deliver goods.
For policymakers, this creates a difficult situation. We find ourselves in a stagflation environment with rising costs, rising unemployment and low growth. Interest rates alone cannot fix global oil prices, but inflation driven by fuel still affects inflation expectations and household budgets.
Fertiliser and Agriculture: The Hidden Pressure Point
A less visible, but equally important, channel is fertiliser.
Modern agriculture is deeply dependent on energy. Fertiliser production is energy‑intensive, particularly nitrogen-based fertilisers that rely on natural gas and oil. When global energy prices rise, fertiliser prices tend to follow.
South Africa imports a significant portion of its fertiliser. Farmers therefore face higher costs when oil prices increase, especially when the rand is under pressure. These higher input costs affect decisions long before consumers notice the impact.
Farmers can absorb the costs, reduce usage (which risks lower yields), or pass the costs on. Over time, these pressures show up in higher food prices, particularly for staples and fresh produce. Food inflation hits lower‑income households hardest, as food makes up a larger share of monthly spending.
This is one of the reasons energy prices play such an important role in broader economic stability.
A Look Back: Lessons from the 1970s Oil Crisis
This is not the first time global oil markets have been disrupted by Middle Eastern conflict. The 1970s provide a powerful historical parallel.
In 1973, following the Yom Kippur War, Arab oil producers reduced supply to countries that supported Israel. Oil prices surged, inflation spiked, and many economies entered a period of weak growth combined with rising prices, a phenomenon later known as stagflation. A second shock followed the Iranian Revolution in 1979, which again disrupted oil supply and sent prices sharply higher.
South Africa was affected then too. Higher fuel costs fed into transport prices, agricultural costs, and general inflation. Economic adjustment was painful and gradual. What eventually resolved those crises was not a single event. Instead, markets adapted over time. New oil fields were developed outside the Middle East. Countries improved energy efficiency, reduced usage, diversified their energy sources, and built strategic oil reserves. As geopolitical tensions eased and supply increased, oil prices stabilised.
The key lesson from the 1970s is important: oil shocks are severe and inflationary, but they are not permanent. The adjustment, however, can take years rather than months to resolve. In the 1970s we experienced runaway inflation, it almost fed on itself, and the mere expectation of inflation caused more inflation. Getting inflation under control was often referred to as “trying to catch a tiger by the tail”. This time the authorities need to be very careful that this does not occur again.
Why This Matters Now
The situation today does not need to mirror the 1970s exactly to be disruptive. Even a moderate but sustained increase in oil prices can place real strain on South African households and businesses.
The danger is not only in sudden spikes, but in prices remaining elevated for an extended period. Persistent higher fuel costs would keep pressure on inflation, limit consumer spending, and make it harder for the economy to gain momentum.
For agriculture, higher fertiliser and transport costs now can mean higher food prices later in the year. These effects arrive with a lag, which often catches consumers by surprise.
A Balanced Closing Thought
It is important to note that much of the discussion above reflects a worst‑case scenario. Financial markets tend to price in risk quickly, often before the full outcome of the conflict is known. As a result, oil prices can rise sharply even if actual supply disruptions never materialise.
If the conflict involving Iran were to be resolved swiftly, or if escalation is avoided, the impact on oil prices could prove to be short‑lived. History shows that oil markets are highly sensitive to headlines in the early stages of geopolitical tension but can stabilise just as quickly once uncertainty begins to fade. In that case, fuel price increases in South Africa may be limited in size and duration.
A quicker resolution would also reduce the knock‑on effects on fertiliser prices and agricultural input costs, lowering the risk of sustained food inflation later in the year. While there may still be temporary discomfort for consumers, the broader economic impact would be far less severe than in a prolonged conflict scenario.
In other words, while the risks are real and worth understanding, they are not inevitable. As with past oil shocks, the final outcome will depend not only on the conflict itself, but on how long it lasts and how global markets respond once uncertainty begins to lift.
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