The drop in the global oil benchmark of almost $128 a barrel was accompanied by a jump in the dollar of around 15% over the same period. This means that fuel prices remain a major factor driving up the cost of living in much of the world.
Oil demand powerhouses like China, India and the European Union all saw lower real crude price declines than the benchmarks suggest. And for some emerging markets like Sri Lanka, the impact of soaring oil prices and collapsing currencies has already manifested itself in the form of near total economic collapse.
“A stronger dollar is a headwind for oil-consuming countries whose currencies are not pegged to the greenback,” said Giovanni Staunovo, commodities analyst at UBS Group AG. “Over the past 12 months, oil prices have risen much more in local currency terms.”
There is no easy solution. Raising interest rates to support currencies risks slowing down already fragile economies, while developing countries need to keep an eye on their dollar reserves.
Eurozone countries are heavily dependent on imports for their oil. With virtually no local supply of rough, each of the five largest economies in the currency bloc – Germany, France, Italy, Spain and the Netherlands – are at least 90% dependent on foreign purchases to operate. refineries.
Against this backdrop, the denomination of oil in dollars has proven to be a particular headache for European Central Bank officials in what has already been a trying year. Compression of energy supplies due to Russian measures to reduce gas deliveries led to huge increases in consumer prices, reaching a record 9.9% in September.
Asian countries are feeling a similar pain. Through August, the value of China’s oil imports rose 50% from a year earlier, despite falling overall volumes as the country grapples with restrictions to stop the spread of Covid-19 .
Bank of Korea Governor Rhee Chang-yong complained last month that its currency’s weakness was negating the benefits of lower oil prices. Korea and Japan have sometimes sought to shield consumers from the pain of rising fuel prices by offering subsidies – thereby shifting some of the burden to the government.
Pressure from the strong dollar has prompted India to reach out to trading partners, including Saudi Arabia, Russia and the United Arab Emirates, to shift deals to local currencies. The rupee has fallen around 11% against the dollar this year.
“If crude oil prices persist at current levels or continue to recover, this could lead to large trade deficits, leading to further depreciation pressure on the Indian rupee,” said Divya Devesh, currency strategist at Standard Chartered.
Currency Pain | Dollar strength negates much of the benefits of falling oil prices
Although the pressure of the dollar is widespread, it is the emerging economies that are suffering the most. When valued in Ghana cedi, Brent oil is not only above its March trading level, but at a record high.
Soaring fuel prices and currency shortages create a toxic mix for some. Sri Lanka recently shut down its only oil refinery because it couldn’t pay for crude. The country effectively went bankrupt over the summer as it struggled to fund food and fuel imports.
While developed countries have more leeway to absorb currency shifts, “there are definitely emerging markets that are going to experience balance of payments issues due to high oil prices,” said Caroline Bain, chief economist. commodities at Capital Economics.