Ever since Connally made the dollar everyone’s problem, the greenback has become king of the world’s energy and commodity markets. Almost every commodity the world consumes today, from oil to wheat to copper, is priced in dollars. Even tea, the quintessential British drink, is sold in US dollars rather than pounds sterling.
Generally, 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 especially important for poorer countries. The last time the world faced an oil price spike was emblematic of symbiosis. In 2008, the price of Brent reached a record high of $147.50 per barrel, putting a strain on the finances of many countries. But that same year, the dollar plunged to a record low against the currencies of major US trading partners, easing some of the pain. For many importing countries, oil has become expensive, but not exorbitant in local currency.
This historic relationship between the price of oil and the dollar now appears to be broken. Crude has risen 70% over the past year and is currently trading at around $120 a barrel. At the same time, the dollar has gained 10% since mid-2021. This is creating balance of payments crises in many oil-importing countries, especially in Africa, Latin America and Asia. Malawi, one of the poorest countries in Africa, recently devalued its currency by 25% in a single day. Sri Lanka, one of the poorest Asian countries, is on the brink of economic collapse. “The divide between prosperous countries and countries that have a low 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 that can afford to pay exorbitant prices in local currency, such as Europe and Japan, are suffering from increased inflationary pressures.
While Brent is around 20% below the dollar’s record level in 2008, it is changing hands at record highs when expressed in local currency for countries accounting for around 35% of global oil demand. India, the world’s third-largest oil consumer behind the United States and China, is paying around 45% more than 14 years ago due to the sharp depreciation of the rupee against the dollar. The Eurozone is currently paying around 111 euros ($119) a barrel, up from 93.5 euros in July 2008. The UK faces a similar problem: Brent crude peaked at around 74 pounds ($92) a barrel in 2008; today it is almost a third more expensive at 95 pounds. With the yen at its lowest against the dollar for two decades, Japan is also suffering. The list of countries struggling to meet their energy bills goes on and on.
Beyond the domestic economic aftershocks, record 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 part of the world already facing record prices, demand will soon suffer. Analysts at Goldman Sachs Group Inc. estimate that the strength of the US dollar adds an additional roughly $20 per barrel on average when measured in local currencies, “to reach levels equivalent to $150 per barrel of Brent.”
For the OPEC+ oil cartel, the broken relationship between crude and the greenback is a boon. In 2007, during an OPEC summit in Riyadh, the oil-producing countries worried about a collapse of the dollar. With the Federal Reserve poised to raise interest rates further and faster than its central bank counterparts, the U.S. currency is likely to continue climbing — another reason the oil cartel is working harder to put a price cap.
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This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Javier Blas is a Bloomberg Opinion columnist covering energy and commodities. A former Bloomberg News reporter and commodities editor at the Financial Times, he is co-author of “The World for Sale: Money, Power and the Traders Who Barter the Earth’s Resources.”
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