Most analysts laughed when Goldman Sachs predicted that oil would go to $100 a barrel.

Bruce Whitfield:
Well onto the story we don't want to talk about, but we must. Goldman Sachs, I think it was, about two years ago forecasting that oil would go to $100 a barrel, some people laughed at them, others began to sharpen their pencils, and we have got the Brent crude price at $120 a barrel today. Now Goldman Sachs is saying $200, we could have a super spike within the next 12 months. Cees Bruggemans is chief economist at FNB. Do you think it is as far off as 12 months? Has Goldman Sachs got it right again, Cees, good evening?

Cees Bruggemans:
They speak about the next two years and given the fundamentals on both demand and the supply side internationally they have I think as much a chance now as they had two years ago of getting this right. So yes the oil price is still rising and we may well get much higher than where we are at the moment.

Bruce Whitfield:
Regrettably, the only thing that is likely to see a pullback in the oil price is some kind of quite extended global recession of some description.

Cees Bruggemans:
In other words, the oil price puncturing the global economy and at the same time, there is an awful lot of growth still taking place in Asia and in commodity producers, indeed the Asian countries are protecting their consumers through subsidies and controlled prices to a remarkable degree from these price increases so their consumers are not making the adjustment and they are merely barrelling on. So despite the fact that the American economy is slowing down, their petrol demand is down by about three percent over the past year, it doesn't have an impact on the global fundamentals and the oil price continues to rise.

Bruce Whitfield:
And that oil price is rising at quite an alarming rate, when you look at it from a South African perspective the consequences for us of $150, perhaps $200 a barrel for oil, we could maybe benefit on the coal front but not too many other places surely.

Cees Bruggemans:
That’s right, we will have to wait and see whether the inflationary implications globally of such a development whether that would add to for example the precious metals side, we cannot be sure, we have seen over the last three to four years that as the oil price rose for different reasons we also found precious metal prices rising and we basically have been insulated. We cannot be sure that exactly the same dynamic will play out over the next two years but so far so good.

Bruce Whitfield:
The concern I guess about oil is that it is a fundamental component of so much of the inflation basket in South Africa with transport costs having spiked up as sharply as they have ordinary South Africans would feel the enormous pain if we did see the oil price possibly almost double from current levels over the next two years.

Cees Bruggemans:
No doubt about it. After a couple of years of low single digit inflation we suddenly are into low double-digit inflation and yes it is eroding real purchasing power and bearing in mind that interest rates have risen there is a real squeezer out there and it is not over. We are now worrying about R10 per litre of diesel, petrol, but if these kinds of prices were to accentuate internationally then our petrol and diesel prices are going to be substantially higher than what we are seeing now.

Bruce Whitfield:
And ultimately inflation, ultimately interest rates.

Cees Bruggemans:
Yes, that is the short answer.

Bruce Whitfield:
Sasol looking to hedge its production, I know you are not necessarily that close to Sasol per se, but they did lose an economic benefit of something like $1-billion in the last financial year as a result of their hedging policies. If you were Pat Davies would you be hedging aggressively on the oil price at the moment or looking for as much spot price exposure as you could possibly get?

Cees Bruggemans:
No, I am in the second category, I think this baby has longer to run, everybody is starting to talk about a bubble but bubbles are irrational financial behaviour and for me, there is nothing irrational about the demand and supply side internationally to this phenomenon. In other words, what you see taking place are international inefficiencies, yes, at some point it will get punctured and you don't want to be around when that happens, you know in the oil side but between now and that moment, this could run considerably further, given the nature of the international situation.

Bruce Whitfield:
Cees Bruggemans, chief economist at FNB.