By Zimele Mbanjwa
The oil and gas industry has its roots in ancient history, where naturally occurring petroleum and bitumen were used by early civilisations for construction, waterproofing, lighting and medicine. The modern oil and gas industry emerged in the nineteenth century with technological advances in drilling and refining, marked notably by successfully drilled oil wells in Pennsylvania in 1859 and often regarded as the start of the modern petroleum era (Yergin, 2008; Library of Congress, n.d.). Rapid industrialisation, the spread of electricity, and later the rise of the automobile transformed oil and gas into strategic global commodities in the early- to mid-twentieth century. In the later-to-modern period, state control, nationalisation, and geopolitical tensions have reshaped the industry, making oil and gas central not only to global economic development but international politics as well.
Geology, and the value chain
Fossil fuels are formed over millions of years from the buried remains of ancient plants and microorganisms in seas, lakes, and swamps. For crude oil and natural gas, the main source is microscopic marine organisms that settled on the seafloor in oxygen poor places. As more layers piled on top, increasing heat and pressure slowly changed this organic material into oil and gas. The resultant crude oil and gas then moves through porous rocks until they became trapped beneath solid rock layers, forming underground reservoirs that are exploited through natural seepage and drilling.
Upon extraction, crude oil must be refined to produce fuels like gasoline and diesel, as well as chemicals and plastics. This ultimately sums up the oil and gas value chain, which is typically classed into the upstream sector, the midstream sector and the downstream sector.
When wells are drilled, oil, gas, and water are brought to the surface and separated using specialised equipment (upstream sector). The purified crude oil is stored in large steel tanks at near-atmospheric pressure. It is then transported to refineries by pipelines, tanker trucks, railcars, or ocean-going tankers for international trade (midstream). At refineries, crude oil is processed mainly through fractional distillation, which separates it into different hydrocarbon fractions. These fractions are further treated, converted, and purified to produce fuels and products such as gasoline, diesel, asphalt, and heating oil, with lighter products generally having higher market value. These products are then marketed and distributed to customers (downstream).
Oil classification and uses
Crude oil is primarily refined into transportation fuels (gasoline, diesel, jet fuel) and heating oil, while also serving as a vital feedstock for petrochemicals to produce plastics, synthetic textiles, rubber, pharmaceuticals, and fertilizers. It is also used for producing lubricants, asphalt for road construction, and various household consumer goods. Not all crude oil is the same. In fact, oil tends to be classified according to where it is produced, the amount of sulphur it contains, and its American Petroleum Institute (API) gravity, which indicates how light or heavy the oil is.
Oil market dynamics
According to the Organization of the Petroleum Exporting Countries (OPEC), the world's total proven crude oil reserves in 2024 amounted to around 1.57 trillion barrels, with OPEC member countries accounting for ~79.2% (and ~36.2% of global production), and OPEC+ accounting for ~87.9% (~56% of production). From a regional/country perspective, Venezuela (~19.4%) has the most proven reserves, but production is low because much of its oil is heavy and difficult to extract and refine and is often located in challenging formations. In contrast, countries like Saudi Arabia (second in reserves, third highest production) and the United States (ninth in reserves, most production) benefit from easier geology, stronger infrastructure, advanced technology, and supportive policies that enable higher production.
Price dynamics
Oil prices are largely shaped by the balance between supply and demand. Because oil is an essential input across many sectors, price movements respond strongly to market conditions. Expanding supply usually pushes prices down, while stronger demand raises them. Supply depends on geopolitics, production choices, shocks, and technology, whereas demand is influenced by economic activity, transport needs, policy decisions, and the shift toward alternative energy. Together, the balance between supply- side factors and demand-side factors tends to influence price movement.
OPEC
OPEC was established 1960 to coordinate member states' petroleum policies, stabilise oil markets, and balance reliable supply with fair returns for producers. It consists of 12 member countries and ten extra members participating in the Declaration of Cooperation (DoC) to make up OPEC+. By controlling a substantial share of global oil reserves and output, OPEC wields considerable influence over global inflation, economic growth, and energy security. Proponents argue that this collective approach helps reduce extreme price volatility and reinforces producer sovereignty. Critics, however, view OPEC as a de facto cartel, arguing that coordinated production cuts can restrict supply, create artificial scarcity, and raise prices for consumers. Although explicit price-fixing is not stated in its charter, production management has shaped oil markets since the 1970s. Critics also point to weak enforcement of quotas, underscoring OPEC's complex and contested role in the global energy system.
That, while oil prices are based on standard supply and demand balances, supply-side manoeuvring by organisations like OPEC+, who holds a huge concentration of reserves and over half of global production, often plays a big role in controlling prices. Indeed, export data shows that, while the US is the world's largest producer, it remains a mixed producer-consumer system, exporting only about 31% of its crude oil because of very large domestic refining capacity and internal demand. In contrast, OPEC economies are deeply export-oriented, consistently sending over 70% of production to international markets, thus underpinning their outsized influence on global oil trade flows and price formation.
Geopolitical risks
Geopolitics is a key driver of global oil price volatility because a significant share of supply originates from politically fragile regions. Major oil-producing areas such as the Middle East and Eastern Europe are frequently affected by conflict, sanctions, and security disruptions, which elevate supply risk and embed a persistent risk premium in prices (see graph below of geopolitical risk (GPR) Index relative to oil prices).
Events such as the Russia-Ukraine war in 2022 exposed Europe's dependence on geopolitically sensitive energy supplies and triggered sharp rises in oil prices amid sanctions and trade rerouting. More recent conflicts, including Middle East hostilities, Red Sea shipping disruptions and the recent US-Isreal war which has seen disruptions to critical chokepoints such as the Strait of Hormuz, have again driven prices significantly higher. Overall, geopolitical risks amplify oil market volatility, threaten energy security, and transmit economic shocks globally.
The US dollar (petrodollar)
Another common driver of oil prices are fluctuations in the US dollar. To understand this, we must understand the underlying system. The petrodollar system was developed in the 1970s after the collapse of Bretton Woods (the post-World War II monetary system that pegged major currencies to the US dollar, which was itself convertible into gold) and the 1973 oil crisis, when the US reached strategic agreements, most notably with Saudi Arabia and later OPEC, under which oil would be priced and traded in US dollars. In exchange, the US provided security guarantees, military support, and privileged financial access. A key element of the system was the recycling of oil exporters' surplus revenues into US Treasury securities, creating sustained global demand for dollars, reinforcing US financial dominance, and allowing the US to run persistent fiscal and current-account deficits. Over time, the petrodollar became a central pillar of dollar hegemony, tightly linking energy markets, geopolitics, and global capital flows.
Today, the system faces mounting pressure. Geopolitical fragmentation, the expanded weaponisation of the dollar through sanctions, the rise of non-Western energy trade, and attempts by major economies to settle oil transactions in non-dollar currencies are weakening its exclusivity. Additionally, growing US energy independence and shifting alliances have reduced reliance on traditional petrodollar recycling. These trends do not indicate an imminent collapse of dollar dominance, but they do point to a gradual erosion of the petrodollar's stabilising role and a slow transition toward a more multipolar global currency system.
Oil refining
Edo et al. (2024, p. 204) noted that although oil production has increased over time, crude oil price volatility has partly been driven by the disconnect between rising production and the capacity to distribute, refine, and deliver petroleum products. Refinery construction has largely declined since the 1970s. This constrained refining capacity has come to limit how much crude oil can be processed and sold, even when overall oil supply is abundant, thereby restricting market availability and contributing to continued price volatility. This is evidenced by trends (see below chart) showing a strong correlation (coefficient of 0.998) between world demand and refinery output over time, while the measure has fluctuated between production and refinery output (coefficient of 0.896 over time, and -0.234 since 2022).
The petroleum industry in Africa
Africa plays a structurally unbalanced role in the global oil and petroleum market. On the upstream side, Africa remains an important secondary contributor to global crude oil supply, with roughly an 8.5% share of global crude output. However, production is concentrated in a small group of countries, notably Nigeria, Libya, Algeria, Angola and Egypt. While this makes Africa relevant within the Atlantic Basin and for light-sweet crude supply, it does not make the continent a marginal price setter. Production volatility, particularly in Nigeria and Libya, further weakens Africa's influence relative to world supply leaders. The continent also lacks sufficient refining infrastructure to process its own crude oil at scale, forcing large volumes of raw exports and limiting domestic value addition. Africa therefore captures little of the downstream margin, reinforcing its role as a net exporter of crude oil and a net importer of refined fuels.
On the demand side, Africa remains a relatively small but structurally important consumer of oil products. In 2024, Africa's share of world oil demand was 4.5%, which, while modest in global terms, is rising steadily due to population growth, urbanisation and transport fuel needs.
Petroleum industry in South Africa
South Africa has no meaningful crude oil production. Its oil economy is almost entirely downstream and consumption-driven. In refining, South Africa's capacity has declined with the closure and long-term suspension of major refineries (see table below), weakening domestic supply resilience. In 2024, we had around 210 thousand barrels per day (kb/d) of nameplate capacity, accounting for about 5% of Africa's total but less than 0.25% of global capacity.
Prior to 2020, South Africa's crude-oil refining capacity was approximately 700 kb/d, spread across SAPREF, Engen, Astron Energy and NATREF. This implies that roughly 70% of South Africa's pre-2020 crude-oil refining capacity has been lost or idled. As such, this has increased exposure to global refining margins, freight rates, port logistics and supply disruptions, while removing the natural hedge that domestic refining once provided against international product price volatility.
Having largely unhedged exposure to global supply shocks, South Africa largely experiences oil price surprises as purely negative from a macroeconomic perspective. That is, we typically see higher inflation, forced monetary tightening, a weaker currency and slower growth. Recurrent geopolitical shocks from the Syrian war in 2011, and Crimea's annexation in 2014, to Russia's invasion of Ukraine in 2022 and the current Middle East war (US & Isreal against Iran) have repeatedly exposed and reinforced this structural vulnerability.
Since 2010, South Africa's experience during major oil-price shocks has been consistent: oil price spikes have tended to weaken or at best destabilise the rand, lift inflation, push bond yields higher and force the South African Reserve Bank (SARB) into a tightening bias, while oil price collapses ease inflation and allow policy accommodation, even if the currency does not always benefit. According to Bloomberg data, supply driven oil spikes have typically been associated with a 5% to 10% depreciation in the rand over a six month horizon, alongside a sharp rise in government bond yields as inflation expectations lift and risk premia widen. In these episodes, the SARB has tended to respond cautiously at first but ultimately tightens policy by 25 to 50-basis points (bps) within six to 12 months when oil driven fuel inflation threatened to push headline CPI toward or above the upper end of the 3 to 6% target band.
US-Isreal vs Iran (2026): Will it be oil-right?
So far, the war appears to be triggering the same dynamics, but with greater force than before. Oil prices have increased about 45% at the time of writing, the rand has weakened to roughly 8% to the US dollar and long dated government bond yields have jumped by more than 90bps, marking the most abrupt sell off since the Covid 19 shock in March 2020. While the SARB kept interest rates unchanged in March the governor's tone has understandably become notably more hawkish, and the bank's 2026 inflation forecast was lifted by 3.7% from 3.3% due to higher energy prices.
While not forecast by the SARB itself, investors are now pricing multiple rate hikes before year end, with some analysts expecting tightening to begin as early as May. With the Strait of Hormuz largely closed and analysts warning that oil prices could rise significantly further if the conflict drags on, this conflict risks being both more severe and more prolonged than past oil price shocks, implying continued pressure on the currency, elevated bond yields and a stronger probability of SARB policy tightening ahead.
That said, higher fuel prices may impact demand in the economy, which could act as a potential limiter on so-called "second round effects" - something the SARB will be monitoring closely. The SARB does not generally respond to immediate price shocks, notably in historically more volatile components of the inflation basket like fuel. The bank will, however, respond to shocks when they filter through to the cost of other goods and services where the impact has the possibility of becoming more entrenched.
Academic references
