Real GDP Petroleum consumption
R² = 0.2634
-3.0 -2.0 -1.0 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0
-2.0 -1.0 0.0 1.0 2.0 3.0 4.0 5.0 6.0
YoY % ch in petroleum consumption
YoY % ch in Real GDP
Growth in Real GDP & Petroleum Consumption
177 4.1.4 Summary
The review of historical experience and various empirical estimates of the impact of oil price shocks on South Africa are broadly consistent. They demonstrate that rising crude oil prices generally result in: a depreciation of the exchange rate; a boost for some export commodities, at least initially;
higher rates of producer and consumer price inflation; lower (or negative) growth in real GDP; falling employment and real wages; and greater poverty and inequality. The sectors most adversely affected include agriculture, light manufacturing and private services, while the sectors benefitting most in relative terms are domestic synfuels, electricity, and coal and gold mining. Demand for petroleum fuels is more responsive to income than to price, especially in the case of diesel. With this background, the likely socioeconomic impacts of global oil depletion on South Africa in the absence of proactive policy interventions are described below.
4.2 Scenarios for impacts of global oil depletion
As mentioned at the beginning of this chapter, the global peaking and decline in oil supplies is an unprecedented phenomenon, and there is thus considerable uncertainty about its likely impacts at both a global level (as noted in Chapter 2) and at a national level. The historical experience and review of empirical studies provide useful pointers about the likely impact of oil price shocks, at least in the short to medium term. In the next several years at least, the impacts of global oil depletion are likely to be felt mainly through rising (and volatile) fuel prices. A key difference in the future, however, is the likelihood of repeated and cumulative shocks occurring over a period of 10 years and more. Furthermore, as time progresses the likelihood of physical shortages will increase, perhaps on a sporadic basis initially (i.e. lasting for a few months at a time), but eventually becoming chronic in the longer term.
This section develops impact scenarios for the five subsystems of the socio-economy, based on the assumptions listed in the introduction to this chapter, restated here for clarity:
global oil production begins to decline by 2-5% per annum, but oil export supply declines slightly faster on account of rising domestic consumption in oil exporting countries and possible resource nationalism;
no prior programme of mitigation has been undertaken at either global or South African levels, and there is no co-ordinated international policy response;
oil prices continue to follow a rising trend, but with significant volatility around that trend; and
physical fuel supply disruptions and shortages are experienced from time to time.
These subsystem scenarios correspond to the global impacts described in sections 2.3.1 to 2.3.4, and assume a gradual ‘oscillating economic decline’ in line with the ‘long descent’ scenario outlined in section 2.3.6. Section 4.2.6 considers the possibility of a more rapid, systemic collapse in the South African economy, corresponding to the ‘collapse’ scenario developed in Section 2.3.6.
4.2.1 Energy
South Africa’s energy system relies on petroleum fuels to meet nearly a third of final energy demand (see Section 3.1). This section considers the likely impacts of rising prices and declining volumes of crude and refined oil imports on South Africa’s energy system.
Rising oil prices will gradually dampen demand and result in less petroleum energy being consumed in the country, especially in the longer term. The prices of other energy sources, especially those
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that are to some extent or other substitutable for oil, such as coal and gas, are likely to rise along with the oil price. These price rises will in turn put upward pressure on the price of electricity, since coal is the feedstock for about 90% of national power generation. Furthermore, because approximately one third of the coal feeding Eskom’s coal-fired power stations is transported by truck, the costs of this feedstock will rise as diesel prices rise. Higher prices of refined diesel fuel will also raise Eskom’s costs of running open cycle gas turbines (OCGTs), which are used to meet peak electricity demand. The costs of buying or manufacturing, transporting and installing alternative energy infrastructure, including wind turbines and solar panels, will also increase to some extent as a result of rising fuel costs. The rising cost of alternative energy sources illustrates their dependence on an economic infrastructure that is itself dependent on oil. Thus there will be added upward pressure on electricity prices, in addition to the pressure imposed by funding requirements for Eskom’s new build programme.116 However, the rising cost of fossil fuel energy will make renewable energy (RE) sources relatively more competitive and is likely to stimulate investment in this sector.
Increased production of RE technologies could deliver economies of scale and learning, and hence reduce their prices, setting off a positive feedback loop. Thus over the longer term, one can expect a process of (partial) substitution of renewable energy for oil and coal. If economic conditions are deteriorating (as discussed in Section 4.2.4 below), however, the expansion of RE might not be rapid enough to offset declining consumption of fossil fuels, resulting in diminishing total energy consumption.
Acute physical shortages of oil products, which could arise from time to time owing to global supply interruptions, could have more serious consequences than gradually rising (or volatile) energy costs.
Most immediately, Eskom’s demand for diesel fuel to run its open cycle gas turbines will have to compete with transport, agriculture and other demand sectors for scarce diesel supplies. Perhaps most significantly, a sudden interruption of liquid fuel supplies could disrupt the flow of coal to power stations and thereby seriously compromise Eskom’s ability to maintain sufficient power generation to keep the national electricity grid stable. Although not caused by liquid fuel shortages, a similar situation arose in early 2008 when problems in the procurement and transportation of coal resulted in insufficient stockpiles at some power stations, contributing to the electricity crisis which involved blackouts and load shedding. Power outages would in turn hamper the refining of petroleum fuels and their distribution through pipelines and at retail outlets, thus setting in motion a self-reinforcing feedback loop with very adverse consequences.
It is instructive to create scenarios for future liquid fuel supplies in South Africa, based on assumptions and evidence discussed in Chapter 2. As shown in Section 2.1.6, world oil exports peaked in 2005, and between 2006 and 2009 declined by an average of 1.8% per annum (p.a.).
World oil production is expected to decline by between 2-5% in a mild scenario (Hirsch, 2008). Thus a conservative assumption is that world oil exports will decline by about 4-7% p.a. once global oil production begins to decline, which is assumed here to be in 2015. In a worst case scenario, if oil exporters withhold oil or resource wars result in production stoppages in some areas, the rate of decline could be as high as 10% p.a., at least in some years. The simplest assumption for South Africa’s oil imports is that they will decline at a similar rate to world exports, which assumes that South Africa maintains its share of world oil imports, which was 1% in 2011. If anything, this is an optimistic assumption, as larger and richer nations are more likely to be able to out-bid South Africans for declining supplies of oil. For domestic synthetic fuel supply, it is assumed for this scenario that Sasol increases its 2011 level of production by 3.2% in 2014 as per its stated plans (Sasol, 2010) and maintains this level until 2035, assuming that its Secunda facilities commissioned in the early 1980s have an expected lifespan of about 50-60 years. Furthermore, it is assumed that PetroSA maintains its 2011 level of production for eight years, sustained by the newly found F-O gas field (PetroSA, 2010), after which it runs out of feedstock. In this scenario, biofuels do not make a
116 The Integrated Resource Plan for Electricity Generation (IRP2010) is discussed in the next chapter.
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material contribution to liquid fuel supplies as a result of constraints on water and arable land. These liquid fuel projections are shown graphically in Figure 4-15. Assuming a 4% (10%) decline in oil imports beginning after 2015, total liquid fuel supply would be 75% (54%) of its 2015 level by 2025, and 60% (39%) of its 2015 level by 2035. Should the onset of global ‘all oil’ production decline occur sooner or later than 2015, the depletion profiles would simply be shifted earlier or later by the corresponding number of years. The relative contributions of imports and domestic fuels supplies are shown for the 4% decline scenario in Figure 4-16.
Figure 4-15: Liquid fuel scenarios under business-as-usual for various decline rates
Source: Author’s calculations
Figure 4-16: Liquid fuel scenario under business-as-usual (BAU)
Source: Author’s calculations
0 20 40 60 80 100
0 20 40 60 80 100
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035
Index (2015 = 100)