Turn up the gas, cut off the oil, and do it quickly

The government has failed to secure alternative sources of crude oil at futures prices from Nigeria in the wake of US sanctions against Iran. So we now pay premiums for spot crude to compensate.

Iran traditionally supplies 25 percent of South Africa’s crude oil, exposing us to considerable supply-side risk. Nigeria is one of the few suitable alternative suppliers of crude, given that our refineries are not equipped to deal with the high-sulphur crude from suppliers such as Saudi Arabia.

However, we are overdependent on imported crude oil as it is, not to mention our destructive addiction to coal. If this energy mix does not change soon, our economy will suffer. The current concoction of volatile global demand for commodities (and thus volatile exchange rates), a jobs crisis, low growth, weak political institutions and exponentially rising administered prices already puts us in danger.

Changes to the mix can be made quickly through decisive leadership. But the prices of natural gas futures are rising. The window of opportunity to secure gas at a much cheaper price than oil is small, so the government will have to act immediately to secure these contracts.

South Africa consumes 550 000 barrels of oil a day, of which 370 000 barrels are imported. The cost of this imported oil, at current prices of about $110 a barrel, is $14.9 billion a year, or R131bn. That equals 4.53 percent of revised 2011 gross domestic product, and 17.5 percent of all imports at 2012 nominal values.

Oil supplies 12.8 percent of our energy needs, with natural gas accounting for 3.1 percent and coal for 71.1 percent. But the latest estimate from the Human Sciences Research Council (HSRC) is that imported crude constitutes 64 percent of demand for all liquid fuels. There are serious downside risks to this over-reliance on imported oil.

Not only does a sudden or constant rise in oil prices undermine inflation targeting, it also creates latent inflationary pressures throughout the economy. A weakening rand and higher global oil prices is a double whammy for inflation as it translates into higher transport and therefore food costs. This especially devastates the poor.

A recent HSRC policy briefing notes that high oil prices are a major threat to energy security and lead to high direct costs for consumers. However, instead of proposing that this risk be mitigated by diversifying energy sources, it focuses on diversifying oil suppliers and does not place sufficient emphasis on the necessity to reduce reliance on imported crude.

We import only 124 billion cubic feet of natural gas from Mozambique annually. That is equivalent to 22.5 million barrels of oil, a far cry from the 135 million barrels of imported crude. At $7 for 1 000 cubic feet of natural gas, Mozambican gas imports cost $868m, where the equivalent in oil would cost $2.5bn. The cost differential is therefore 2.88:1 in favour of natural gas in terms of equivalent energy value.

Most importantly, increasing natural gas imports would reduce the negative externalities associated with oil and coal. These benefits alone would justify a rapid increase of imports even if gas cost the same as oil. South Africa’s 20-year energy plan requires an investment of nearly R1 trillion in new nuclear energy capacity, which could bankrupt the economy.

Natural gas is abundant in southern Africa and should occupy a far greater role in our 20-year energy plan. The government must act swiftly to build the needed infrastructure and secure gas contracts.

Jacques Smalle is the DA’s deputy spokesman on energy.

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