The government’s decision to sell a large portion of its strategic petroleum reserves has combined with a sharp decline in refining capacity to put South Africa at risk of running out of fuel.
This combination is almost entirely self-inflicted, with the government choosing to sell millions of barrels of oil at heavily discounted rates and the cost of operating a refinery in South Africa skyrocketing over the past 15 years.
However, some of this is also due to the globalisation of supply chains, with it being extremely efficient to import refined petroleum products from a handful of ‘mega-refineries’ in the Middle East and Asia.
This comes at a high cost in the form of a lack of flexibility, with South Africa being unable to shift supply sources and types easily, as the country cannot refine crude oil at a scale that can meet demand.
Econometrix chief economist Dr Azar Jammine said that South Africa has been negligent when it comes to building up an appropriate reserve of petroleum.
Data currently shows that South Africa’s strategic petroleum reserve sits at 7.7 million to 8 million barrels, which is far below its 45-million-barrel capacity.
Much of this decline was due to a dodgy deal between December 2015 and January 2016 when the SFF, a subsidiary of the CEF, sold 10 million barrels of the strategic reserves.
These sales were at heavily discounted prices and covered up, with buyers being chosen without public tenders and no replacement oil being bought.
“We have been so negligent on that part. We had very healthy oil reserves a few years ago, and then the government depleted them at giveaway prices,” Jammine told Newzroom Afrika.
“Just to get a bit more money into the coffers of the government, millions of barrels were sold with very little being replenished.”
As a result, South Africa is even more highly exposed to global oil shocks than it should be, with the government having no meaningful reserve to tap into to stave off shortages or push prices downwards.
The current level of South Africa’s strategic reserves, around 8 million barrels, only equates to around two weeks of demand. The global benchmark is a reserve to cover a minimum of 90 days of demand.
Refining collapse
This is exaggerated by South Africa’s sharply declining refining capacity, with it halving since 2020 as businesses in the country become increasingly uneconomical due to rising costs.
While Glencore maintains its Astron Energy refinery in Cape Town is cash-flow positive, the margins on refining are extremely thin due to a lack of demand from a stagnant economy.
“What we should be doing is refining a lot of the oil far more readily than we have been doing in recent years,” Jammine said.
This would not only give South Africa a significant buffer from shocks, but it would also give it desperately needed flexibility of supply.
Instead of needing to import refined products from a handful of global refineries, the country could import crude oil from a myriad of suppliers and refine it locally.
“The tragedy in South Africa is that we had six oil refineries some years ago. That is now down to two operating refineries,” Jammine said.
“We are so reliant on Sasol to provide a significant share of our supply, alongside being heavily dependent on importing fuel, which was not the case some years ago. It is part and parcel of the deindustrialisation of the South African economy.”
Old Mutual Investment Group (OMIG) analyst Siya Mbatha explained that the lack of refining capacity exposes South Africa to severe swings in prices.
Mbatha explained that refined product prices tend to be more volatile than crude oil prices and, during the current supply shock, have risen the most sharply.
South Africa is one of the most vulnerable to this, with its already small refining capacity being cut in half over the past five years.
This leaves the country with little to no domestic optionality to diversify supply away from refined products to crude oil from Nigeria, Angola, or other regions.
Thus, a decision based on financial gain over the past two decades is now coming back to haunt South Africa in the form of poor energy security.
Even if South Africa could source crude oil from outside the Middle East, it could not refine enough of it to make a difference to local supply.
Mbatha’s data showed that South Africa’s fuel imports have shifted dramatically since 2018, when crude oil was the dominant import. Now, nearly 70% of all imports are refined products.
Source: Daily Investor
