PETER BRUCE | Iran war pushes us towards the abyss

Where US President Donald Trump is concerned, predictions are a risky business, but it is already clear that the war he started against Iran, at the behest of Israeli Prime Minister Benjamin Netanyahu, is going to wreck any chances that South Africa’s economy will grow beyond 1% this year, or that it even gets close.

About a month ago, at an annual meeting with my financial adviser (I know that sounds pretentious given the paltry sum he advises me about), we spoke about whatever new funds we might consider. He said he wasn’t worried. The war would soon be over, and everything would quickly recover.

I need to talk to him again. Not only has the war not ended but Trump, while he has inflicted enormous damage on Iran, is losing this war in almost every strategic sense. The Iranians are tougher than he thought.

“How long will it take,” wrote Paul Krugman, the celebrated US economist, this week, “before Trump accepts the reality that he doesn’t have the cards, that in the end his Iran venture will be resolved in a way that leaves Iran stronger and America weaker than before the war?”

The world consumes roughly 104-million barrels of oil or oil-based products a day (BPD). Before the war the Gulf nations — Iran, Kuwait, Saudi Arabia, the UAE and others — were producing about 14.5-million BPD. That means that by the end of next week more than one billion barrels of oil will have been prevented from leaving the Gulf.

The prospect of outright global recession is on the lips of many senior economists as oil from Iran and its Gulf neighbours, who use the Strait of Hormuz to export their product, remains largely closed, blocked now by both Iran and the US.

The world consumes roughly 104-million barrels of oil or oil-based products a day (bpd). Before the war the Gulf nations — Iran, Kuwait, Saudi Arabia, the UAE and others — were producing about 14.5-million bpd. That means that by the end of next week more than one billion barrels of oil will have been prevented from leaving the Gulf. The reason we haven’t noticed much, beyond the sharp rise in the prices of petrol and diesel, is that major economies have been running down their own fuel stocks.

But they can’t do that forever, and there’s no way even a brief shortage of that magnitude doesn’t have a profound effect on almost everything we do and consume. Krugman, who won the 2008 Nobel economics prize for his work on economies of scale in international trade, calculates that last month global oil in storage was being drawn down at 12-million bpd.

“So far,” he wrote, “despite much higher oil prices, demand for oil has fallen by only a fraction of the loss of supply. Instead, the world economy is running by taking oil out of storage. Since there’s only so much oil in the tanks … if the strait doesn’t open, prices will have to soar high enough — and inflict sufficient economic damage — to destroy another 11 or more million barrels a day of demand. That’s a lot.”

Recession is a real concern, and while minerals & petroleum minister Gwede Mantashe blathers on about supply being “no problem”, he has no idea

In South Africa, Sasol can produce about 150,000 bpd converting coal into fuel, but we consume between 500,000 and 600,000 bpd. We’re incredibly vulnerable if the whole world starts chasing oil.

Any prospect of interest rates falling here this year is just about gone. And while the Treasury has reduced the general fuel levy, that’s only until July. Then pump prices rise sharply (they’ll be rising until then anyway), and the Treasury will have to find savings of just over R17bn to cover its tax losses and meet its deficit target. That’s much more than finance minister Enoch Godongwana was trying to raise when he tried (and failed) to raise VAT by 50 basis points to 15.5% last year.

So the government is going to have to tighten its belt, and it won’t be pretty. In the face of local government elections, politics will get nasty. Hiring and contracts will be frozen, much-needed infrastructure will be delayed. Jobs in construction, cement, transport and steel are threatened. Retailers across the board will feel it too as consumers spend less. The effect on unemployment and the poor could be devastating. Imagine being paid only half your salary for a month or two while your expenses stay the same. How long would it take you to recover?

Recession is a real concern, and while minerals & petroleum minister Gwede Mantashe blathers on about supply being “no problem”, he has no idea. The government should be sharing now its plans for coping with the long-term effects of the supply squeeze and soaring oil price.

It’s a test not only for the government but for new DA leader Geordin Hill-Lewis as well. Can his DA craft a plausible response to the economic pressure to come? It will need to if it wants to avoid being blamed, along with the ANC, if the GNU gets it wrong.