Posted: 2005-03-17 23:58 Is the high oil price still relatively low?  Presenter: Lindsay Williams Guest(s): Michael Keenan High oil prices are creating panic, but some economists are saying that if the price is properly adjusted for inflation we are still paying less than we were in the 1980s. With Econometrix Treasury Management market analyst Michael Keenan LINDSAY WILLIAMS: The US has reported a sharp drawdown in reserves of oil products - particularly heating oil, and unleaded fuel - pushing the oil price to record highs. At one stage, today, it went to $57.50 in the US, and very close to $56 a barrel for Brent crude in London. If we go back to an inflation-linked 1980s price we would be trading at around about $80 to $90 a barrel? MICHAEL KEENAN: Quite right. In real terms we still are down from the 1980s highs. But it is a concern - this continued rise in oil prices has flummoxed even the greatest of bulls out there. We’ve got it - from a technical perspective - at the very least oil is still very much in a bullish trend. If, basically, oil doesn’t close this evening below the $55.5 on Brent crude - we could well see oil prices go to $59, which certainly doesn’t bode well, from a South African perspective, for inflation and interest rate cut expectations. LINDSAY WILLIAMS: Let’s look at it from a South African perspective. The international press says we shouldn’t really worry about it - because the world economy is being managed so well that we can actually cope with these high commodity prices, and particularly oil. From a South African point of view we’ve got the double whammy - rand suddenly on a weakening trend, oil prices up 7% to 8% in the last couple of weeks. What does it mean for us? MICHAEL KEENAN: It really relates to inflation - as we know the SA Reserve Bank (SARB) is targeting inflation. Based on the prevailing petrol under-recovery, together with the increases that will come about from the Road Accident Fund and the fuel levy - we are expecting fuel prices to increase by a further 30 cents per litre at the beginning of next month. This would knock up overall headline inflation - as well as CPIX inflation - for the year by about 1.5%. That would still keep CPI inflation well within the target band - but it definitely dilutes the argument for an April cut of 50 basis points - which the market was widely expecting at the end of last month. We do benefit from high commodity prices - when it comes to the gold, and the mining industry - but from an inflation perspective it’s definitely not good news, and unfortunately consumers might not be in for further interest rate accommodation. LINDSAY WILLIAMS: Does it mean, then, the end of the lowering interest cycle? Oil is right at the top of the list for the SARB when determining interest rates. MICHAEL KEENAN: I think oil - together with very buoyant consumer spending - are probably going to be the deterrents for the SARB. Despite the benign inflationary environment - we are expecting some good inflation numbers at the end of the month. I think the SARB might well adopt a cautious approach at the April MPC meeting. If things don’t improve on the oil front - and consumers continue to spend rampantly - then I think yes, we have probably reached the bottom of the rate cut cycle. LINDSAY WILLIAMS: That’s very sad for homeowners, and people with credit card debt, and overdrafts, etc. What about the bigger picture - the macro-economic picture when it comes to GDP growth? We’ve seen Trevor Manuel talking about raising GDP numbers in the years ahead - do you think this could possibly crimp those numbers? MICHAEL KEENAN: Well, it’s going to being interesting to see if Trevor Manuel is optimistic on growth. As we all know - we desperately need this growth to come through from an unemployment perspective. Unfortunately we might not see any more monetary accommodation, and from the fiscal side the stimulus was relatively moderate at this year’s Budget - from a tax perspective. So it might crimp it, yes. But I still think the government’s approach is the correct one - they are trying to achieve non-inflationary growth, sustainable over the long term, that does away with those boom and bust cycles that we had in years gone by. Investors are looking for some kind of stability in returns, and in the growth performances of the countries they invest in. LINDSAY WILLIAMS: It’s going to be painful for us - as we go to the petrol station, and put petrol in our cars. It’s going to be painful for transport companies, and various other industries - as a whole, how reliant is the South African economy on oil? MICHAEL KEENAN: We are hugely dependent on oil for all those various factors - it is one of our largest imports. From a current account perspective it certainly doesn’t help, and could see the widening on the balance of the trade account - which, in turn, doesn’t help the rand. So we could see the spotlight turn back on the lingering structural imbalance that the rand faces - that is, as I say, the current account deficit. Comments Related to this transcript: Comment on this transcript... Name : Email : Comments :