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Impact of global oil prices

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Recent increases in global oil prices will have an impact on economies in the region, although it will be softened by the weaker US dollar, analysts told IRIN.

John Loos, a noted economist with one of South Africa's largest commercial banks, ABSA, told IRIN that because oil prices had peaked at almost US $50 a barrel before gradually easing off this week, a "gradual uptick in inflation" could be expected in the region. Brent crude oil was trading at US $40.77 a barrel on Tuesday afternoon.

"At current levels I don't think it [the oil price] is much of a shock. For South Africa it will contribute to a gradual uptick in inflation, [but] with the Rand at these levels [around R6.70 to US $1] and oil prices not looking to go much higher - in fact, actually coming back a little - we are not looking like we will miss the [inflation] target range of between three and six percent," Loos said.

"Likewise, there will be a mild inflationary impact in Namibia, Swaziland, Lesotho and Botswana - economies that are ... linked to South Africa," he added.

Current oil prices, although high, were not steep enough to be "of shock proportions" to regional economies.

With the lag effect of recent higher oil prices leading to an increase in the cost of South African fuel - the price at pumps will go up by R0.22 a litre on Wednesday for petrol and between R0.32 and R0.37 for diesel - economists expect a knock-on inflationary effect on most goods, including basic commodities.

This will be offset somewhat by a relatively weak US dollar, said Loos. "The Rand tends to move in the opposite direction to the US dollar and, in real terms, against other major currencies as well; as such I expect it to come back somewhat, [strengthening against the US dollar]. The same will hold true for Swaziland and Lesotho, as they are basically Rand economies, and Namibia [as its currency has parity with the Rand]."

However, he commented that a major oil shock, such as US $60 plus per barrel, would hit global growth and demand for South African commodities.

"Because we are such open, export economies, if other major economies are in recession it's not good for commodities [exports] overall. While there might be an uptick in gold, other base metals like copper, which is especially important for Zambia, would be negatively affected by a slowdown in global [economic] growth and demand," said Loos.

Zimbabwe, which has struggled to find the foreign currency to pay for fuel imports in recent years, would also be affected by higher oil prices. However, Loos argued that as the country was already experiencing hyperinflation, the effect of oil price hikes "may not be that noticeable, given the other problems they have".

A spokesman for the Automobile Association of South Africa, Gary Ronald, told IRIN that "what's normally happened in the past is that any increase in the price of diesel fuel, specifically, is normally passed on to the consumer and [price shifts] are only felt on [store] shelves two to three months later".

Ronald pointed out that "road freight guys would normally only pass this [increase in costs] on as late as possible ... Their [profit] margins are very small", so they cannot absorb fuel increases for too long. "Similarly, the road commuter industry - busses, taxis etc - cannot absorb the increases indefinitely and that gets passed on to the consumer."

This article was produced by IRIN News while it was part of the United Nations Office for the Coordination of Humanitarian Affairs. Please send queries on copyright or liability to the UN. For more information: https://shop.un.org/rights-permissions

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