Excessive dependence on imported oil from high-risk regions makes South Africa vulnerable to both economic and national security problems. This is revealed in the Policy Brief which the Human Science Research Council (HSRC) is currently developing based on the risks associated with South Africa’s reliance on oil imports from mainly political volatile countries.
Reducing this vulnerability, according to the policy brief, requires a different approach to energy security, the state BuaNews agency said. The brief explores the nature of South Africa’s oil-import risks and the impact on oil prices; potential government diversification strategies to diminish such risks, and the impact of such strategies on South Africa’s oil-import diversification policy. The petrol price in South Africa is linked to the price of crude oil in international markets.
Rising oil prices and price volatility as is the case currently, with Brent crude passing the $100 mark for the first time since 2008, has been shown to stifle economic activity and reduce asset values, BuaNews adds. For South Africa, oil is key to the country’s energy security. High oil prices are a major threat to the country’s overall energy security and lead to high direct costs for consumers.
There has been a gradual decrease in South Africa’s oil-import diversification index, an indicator of the number of sources from which the country imports oil. The index reached its lowest value of 0.68 in 2007, which is an indication that the country has increased the diversity of the number of sources from which it imports crude oil supplies. The extent to which import portfolio risk is reduced by diversification is dependent on the nature and extent of market and political relationships between supply sources.
The risk of importing crude from a particular source is defined as a function of geopolitical factors, foreign direct investments in the country’s oil sector, and the country’s membership of OPEC. Imports from the Middle East carry the highest risk weight (34.7%), followed by Africa (19.2%), South America (14.7%), Russia (10.3%), North America (10%) and Europe (5.4%). High risk weight implies high costs and lack of consistency, a situation that can imply higher prices in oil-related products, hence high direct costs to consumers.
The policy brief suggests that South Africa should aim for supply sources with low risk-weights.
The increase in import specific risks can be attributed to South Africa’s obtaining its crude oil imports from only two sources, the Middle East (82.2%) and African (17.5%) regions, both of which experienced oil-supply disruptions in 2004. Results also indicate that while diversification of supply sources contributes to a lowering of the oil-import portfolio risks, a diversification strategy that increases supplies from relatively risky oil-producing regions of the Middle East and Africa, would only serve to enhance the specific risk of South Africa’s oil imports.
However, the study recommends that South Africa should diversify imports from risky regions such the Middle East, to the relatively less risky regions of Europe and North America in order to achieve a significant reduction in specific risk of oil imports. South Africa needs to advance strategic partnerships and cooperation between subsidiaries of the government-owned Central Energy Fund (CEF) and private firms in the sourcing of crude oil.
The country also needs to establish specific bilateral relations with less risky oil suppliers such as Russia, Europe and North America, while at the same time taking other cost factors into careful consideration, suggests the policy brief.