January 10th, 2018
Effects of 1973 Oil Shock and 1979 Energy Crisis on South Africa’s Economy – part3
The 1979 Energy crisis also attracted a significant amount of research into its impacts on South Africa’s economy. It was for instance advanced in one study – which did not take into account the effects of food price – that after seven months; a 10 percentage point increase in petro prices led to a 0.7 percentage point increment in consumer inflation with the rate of inflation subsequently decreasing below the starting rate (Kantor & Barr 1986). Van der Merwe and Meijer (1990) also presented detailed description of the antecedents of the three oil shocks (1973, 1979 and 1990) giving the association of the oil prices with important prices in the South African economy such as gold prices, petrol prices, consumer price index and terms of trade. In line with the expectations the global oil price changes affected the petro prices directly and immediately (Van der Merwe and Meijer 1990, p. 10). The 1973/74 and 1979/80 shocks were also noted to directly contribute to an increased consumer price index an effect advanced to have been brought out via their effect on petro and other household oil-related products (Van der Merwe and Meijer 1990, p. 11). The high gold prices, ensuing strength of South Africa’s balance of payments and high ‘confidence in future dollar price[s] of gold’ were however noted to compensate for the adverse impacts of increased petro prices and consumer index (Van der Merwe and Meijer 1990, p. 12).
A 2000 business conference also noted the economic conditions that corresponded to the oil shock and energy crises. In a speech by the South African Reserve Bank Governor of the time; the 1970s were noted to have been ‘a decade of high inflation compared to the 1960s’ with the 1960-1970 average annual inflation of 2.6 percent having increased to an average of 10.2 percent from 1970 to 1980 (Mboweni 2000, p. 2). The increased inflation was also noted to have slowed down the growth in the economy from the 1960s annual average of 5.7 percent to 3.4 percent annual average in the 1970s (Mboweni 2000, p. 3). This change in inflation and economic growth levels corresponded to increased oil prices during both the 1973 oil shock and the 1979 energy crisis (‘Crude oil prices 1861-2006’ cited in: Fofana, Chitiga & Mabugu 2009, p. 5510). Even though most advanced countries’ in other regions of the world had also shown similar slow downs in growth and rapid increase in inflations during the 1970s; the similarity ended in the 1980s when these countries were able to control their inflation while that of South Africa soared (Mboweni 2000, p. 3). Such was probably due to the restrictions that were sustained against the country with inflation levels having been observed to have dropped following the end of the apartheid rule (Mboweni 2000, p. 3). These propositions contrast a fair finding of economic resilience by more recent studies.
Recent studies have also continued the exploration of impacts of the oil shocks on the economy of South Africa following further global energy crises. PROVIDE (2005) for instance use a computable general equilibrium (CGE) model to assess the effect of international oil prices on various indicators of the economy. One of the findings of the research is that an increase of 20 percent in international oil prices leads to a 1 percent drop in Gross Domestic product [GDP] but the resultant currency deflation has positive agricultural outcomes especially for export-destined produce (PROVIDE 2005). The long-term, projections of the study however reveal that mobility of labor and capital that follows the high oil prices are disadvantageous to the economy (PROVIDE 2005). Using a Variance Auto-Regression (VAR) model, Bellamy (2006) also found out that the South African economy was quite resilient to oil price shocks mainly due to a compensating effect of the gold price. While examining the impact of rising energy prices Kohler (2006) advances South Africa’s low vulnerability to oil price shocks to be largely attributable to relatively lower dependence on oil as an energy carrier and the numerous available energy substitutions possibilities’ whose technological and financial viability is brought about by higher oil prices in the global markets (p. 3). Wakeford (2006) also gives a brief description of the antecedents, nature and impact of four oil shocks (1973/74, 1979/80, 1990, and 2003-2006) on South Africa. With the rise in the oil prices in 1973 (‘Crude oil prices 1861-2006’ cited in: Fofana, Chitiga & Mabugu 2009) to almost four times, Wakeford (2006) advances that the shock had significant repercussions to many industrialized countries’ economies such as ‘wage-price spiral and a recession’ (p. 7). The resultant inflation and declining monetary stability are noted to have elevated the gold prices by 66 percent (Wakeford 2006, p. 7). The second crisis is also advanced to have increased consumer price index as noted by Van der Merwe and Meijer  (Wakeford 2006, p. 7).