Worst-case scenario for petrol prices next month

Oil prices could rise by up to 75% if a regional war breaks out in the Middle East and exports from the region are significantly impacted. 

This is according to the World Bank’s scenario planning, which outlined several possibilities for the price of oil based on the impact of historical conflicts in the Middle East. 

The Basic Fuel Price, which is based on the global oil price, makes up half of the total pump price of fuel in South Africa. 

FNB’s economics team said this means, for example, that a 10% increase in the price of oil would increase the petrol price by around 5% if the rand’s value stayed the same. 

It has been a year since the most recent tension between Israel and Palestine broke out. Contrary to what many would have hoped, tensions have flared up, and risks of further escalation are material.

Israel has not been battling Hamas alone but Hezbollah and the Houthis as well. On occasion, Iran has directly entered the arena, and the world now awaits Israel’s response to the latest Iranian missile attack. 

Fears are that it could target Iran’s oil infrastructure, removing nearly 2 million barrels per day (mbpd) from the global oil supply. 

There is a likelihood that spare capacity from OPEC countries, predominantly Saudi Arabia, would easily be able to bridge the gap. 

However, they are also likely to be impacted by the conflict, with 21 million barrels of oil travelling through the narrow Strait of Hormuz every day. 

The majority of oil fields in the region are around the Persian Gulf, resulting in nearly all oil from the region travelling through the strait, which Iran, the UAE, and Oman control. 

When the conflict first broke out in the Middle East in October 2023, the World Bank ran several scenarios that outlined the potential impact on oil prices based on historical experience. 

In their estimates, a small disruption scenario, which would remove between 0.5 and 2 mbpd of global oil supply, comparable to the supply disruption observed during the Libyan civil war in 2011, could see prices rise by up to 13% initially. 

A medium disruption scenario would reduce global supply by 3 to 5 mbpd, comparable with the Iraq war in 2003, and the knee-jerk reaction could see prices lift by up to 35%. 

A large disruption scenario would hit the global oil supply by 6 to 8 mbpd, comparable to the Arab oil embargo in 1973, and prices could rise by up to 75%.

The table below outlines the potential impact on the price of petrol in South Africa, provided the rand does not weaken or strengthen. 

What makes the large disruption scenario increasingly likely is comments from OPEC members, who said the price of oil should be around $80 per barrel. 

OPEC has already imposed supply cuts to stabilise the price of oil and artificially reduce supply to raise prices. It has already removed around 5 mbpd worth of supply. 

However, the impact on the price of oil may not be as severe as predicted by the World Bank due to declining demand from China as the world’s second-largest economy remains under pressure. 

Disruptions from the Middle East are also not definite, with the US having asked Israel to avoid striking Iran’s nuclear and oil facilities. 

If China’s government stimulus fails to have the desired impact, demand from the number one importer of oil could fall further, putting downward pressure on prices. 

OPEC and Russia, known as OPEC+, implemented a series of production cuts since 2022, amounting to around 5 million barrels per day, or 5% of global demand, to support prices.

Unwinding this could theoretically replace Iran’s total output of 3 million barrels per day if the cartel feared that oil markets would become destabilised, Old Mutual Wealth investment strategist Izak Odendaal said. 

In other words, while oil prices could still move even higher, it seems unlikely that prices would spike back to $130 per barrel, as was the case in the wake of the Russian invasion of Ukraine. 

Certainly, a repeat of the 1970s oil shocks, sparked by the Yom Kippur War in 1973 and the Iranian Revolution in 1979, is highly unlikely. 

Odendaal said oil prices rose tenfold in real terms between 1970 and 1980, devastating a global economy that was much more dependent on oil than it is today. 

He also explained that since the 1970s, the Middle East’s control over the supply of oil has been greatly eroded by fracking in the US and increased supply of oil from South America. Nowadays, it only contributes around a quarter of all oil.