Death by a thousand barrels

Petrol and frustration are words often used in the same sentence. As oil prices surge, consumers are reaching breaking point. By the way South Africa’s biggest fuel refineries are shutting down.

International fuel giants Shell and BP have decided to call it quits and are closing South Africa’s biggest oil refinery.

This may seem like the usual disinvestment from dirty fuel, as the world moves towards cleaner energies. It is more complex than that with far-reaching consequences.

I spoke to Syd Vianello, a veteran and well-respected retail analyst as well as a petrol station owner.

“South Africa and the rest of the world, is not facing a situation where petrol isn’t going to be required next week or next month because the whole world’s going electric.”

The dependence on fuel remains, especially in a developing economy such as South Africa where the average age of vehicles on the road is 12 years.

It is highly unlikely South African consumers will find the extra cash to buy new electric cars in a country that is short of electricity anyway.
The demand for oil remains high, but oil is not loaded into our vehicles, refined petroleum is.

Petroleum refineries, like the one, recently shut down, convert crude oil into petroleum for the tank.  Without the ability to convert oil into petrol South Africa becomes more reliant on global partners.

The question must be asked why then are these vital refineries closing their taps?

The primary answer is age and cost. The refineries are old and the required capital to bring them into the modern age is substantial.

“These refineries were built in the 1960s and there is clearly a reluctance to invest more money now,” says Vianello.

The reluctance does not solely come from a desire for green energy.

“The fuel industry in South Africa is price-controlled. There is a fixed margin for distribution, a fixed margin for refining, a fixed margin for everything.”

The lack of a free fuel market in South Africa, combined with domestic risks, does not translate into a profitable enough risk-reward return on investment for major energy companies like Shell and BP.

It is clear, over-regulation destroys the will to do business.

“Legislation, laws, and regulations on refineries are the refineries have been allowed a certain return on capital invested. But the oil companies have not been granted a decent return on capital employed,” says Vianello.

The lack of future investment is a damning indictment of our country. The loss of current and future jobs is only the beginning of the pain.

If one extrapolates this frustration of over-regulation across the industry, the stranglehold on business and entrepreneurship is significant.

The negative impact on growth is not the only cause for concern, significant risks arise due to the closing of refineries.

“Currently there’s a glut, an oversupply of refined fuel around the world. If the glut disappears for whatever reason, then there is a problem.”

One of those reasons may be the Russian invasion of Ukraine. Though this must not cause immediate panic as there is a substantial amount of fuel storage in South Africa.

The next risk is storage.

“What happens if a ship transporting refined fuel does not arrive on time and storage tanks empty?”

This may be a small risk, but the risk is there. The last major long-term risk is the loss of skill.

“The highly qualified people who run those refineries are going to be out of a job. If they cannot find jobs will lose those skills as they emigrate.”

With the world experiencing a dangerous turn of events with the war in Europe the closure of refineries in South Africa may seem to be a small problem and the country can continue as normal.

Yet, the combined impact of each negative story can grow. The nation must remember the tale of death by a thousand cuts. Each cut doesn’t hurt much and seems small until you bleed to death.