A strong dollar has worsened today’s oil shock for importers
Crude is dearer than its 2008 peak of $147.50 in local currencies
Just over 50 years ago, at a meeting of the world’s top economic powers, US Treasury Secretary John Connally shocked his counterparts from other countries by proclaiming the dollar “is our currency, but it’s your problem.” Back then, America wanted a cheaper currency, forcing others to revalue theirs. Half a century later, the global economy faces the opposite challenge: The American greenback is hovering at a 20-year high against its fellow major currencies, creating a huge problem for everyone outside America buying dollar-denominated goods, like crude oil. And no commodity is more important than crude oil.
Since Connally made the dollar everyone else’s trouble, the greenback has become king of the global energy and commodity markets. The price of nearly every raw material the world consumes today, from oil to wheat to copper, is set in US dollars. Even tea, the quintessential British beverage, is priced today in the US currency rather than sterling.
Typically, a strong dollar means weaker commodity prices—and vice versa. The commodity-dollar relationship tends to act as a cushion for the global economy with one offsetting the other, which is particularly important for the world’s poorer countries that struggle to pay their import bills priced in dollars.
Indeed, the last time the world faced surging oil prices was paradigmatic of the symbiosis. In 2008, the cost of Brent oil surged to an all-time high of $147.50 per barrel, straining the finances of many nations. But that same year, the US dollar plunged to a record low against the currencies of America’s major trading partners, easing some of the worldwide pain of expensive oil. For many oil importing nations, crude oil imports became expensive, but not quite as exorbitantly costly in their local currencies as they might otherwise have been.
That historical dollar-oil price relationship now appears to be broken. Crude has risen 70% in the past year, and currently trades at about $120 a barrel. At the same time, the dollar has gained 10% since mid-2021. That’s creating balance-of-payments crises in many oil-importing nations, particularly in Africa, Latin America and Asia.
Malawi, one of the poorest nations in Africa, recently devalued its currency by 25% in a single day. Sri Lanka, among the poorest Asian countries, is on the brink of economic collapse. “The divide between the prosperous and the countries that have a lower ability to pay for commodities is becoming extremely stark,” Mike Muller, head of Asia at Vitol Group, the world’s largest oil trading house, said on Sunday. Even those who can afford to pay sky-high prices in local currency, such as Europe and Japan, are suffering via increased inflationary pressures.
While Brent oil is about 20% below that 2008 all-time dollar high, it’s changing hands at record levels when expressed in local currency for countries accounting for roughly 35% of the world’s oil demand.
India, the world’s third-largest oil consumer behind the US and China, is paying about 45% more than it was 14 years ago due to the steep depreciation of the Indian rupee against the dollar.
The Eurozone currently pays about €111 per barrel, compared with €93.5 in July 2008. The UK faces a similar problem: Brent peaked at about £74 pounds per barrel in 2008; today, it’s almost a third more expensive at £95. With the Japanese yen down to its weakest against the dollar in two decades, Japan is also hurting. The list of nations struggling to meet their energy bills goes on and on.
Beyond the domestic economic aftershocks, record high oil prices in local currency matter for the energy market itself. Oil traders are looking for signs of demand destruction—the point at which higher prices lead to reduced consumption. For now, oil demand growth has remained robust, boosted by pent-up consumption as the world emerges from the pandemic. But with a significant chunk of the world already facing record prices, demand will likely soon suffer. Analysts at Goldman Sachs Group reckon that the strength of the US dollar is adding an average of about $20 a barrel extra when measured in local currencies, “to reach levels equivalent to $150/barrel Brent.”
For the OPEC+ oil cartel, the broken relationship between crude and the greenback delivers a windfall. In 2007, at an Organization of the Petroleum Exporting Countries summit in Riyadh, oil producers worried about a dollar collapse. With the US Federal Reserve poised to raise interest rates further and faster than its central banking peers, the US currency looks set to continue riding high—another reason for the oil cartel to work harder to put a lid on crude prices.
Javier Blas is a Bloomberg Opinion columnist covering energy and commodities.
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Business NewsOpinionA strong dollar has worsened today’s oil shock for importers
First Published:9 Jun 2022, 10:17 PM IST
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