50 years ago, at a meeting of the world’s top economic powers, US Treasury Secretary John Connelly stunned his counterparts in other countries by declaring the dollar “is our currency, but that’s your problem.” At the time, America wanted a cheaper currency, forcing others to reevaluate themselves. Half a century later, the global economy faces the opposite challenge: The US greenback is hovering at 20-year highs against its major major currencies, creating a huge rush for everyone outside the US to buy dollar-denominated goods. causing problem. There is no commodity like crude oil and more important than crude oil.
Since Connelly made the dollar a hassle for everyone, the greenback has become the king of the global energy and commodity markets. From oil to wheat to copper, almost every raw material consumed in the world today is priced in US dollars. Even tea, the quintessential British drink, is today priced in US currency instead of sterling.
Typically, a stronger dollar means weaker commodity prices—and vice versa. The commodity-dollar relationship serves as a cushion for the global economy, one of which offsets the other, which is especially important for the world’s poor countries that struggle to pay their import bills in dollars. We do.
Indeed, the last time the world faced a spike in oil prices, it was a paradigm of symbiosis. In 2008, the price of Brent oil rose to an all-time high of $147.50 a barrel, affecting the financials of many countries. But in the same year, the US dollar fell to a record low against the currencies of major US trading partners, easing some of the pain of expensive oil around the world. For many oil-importing countries, crude oil imports became expensive, but not as expensive in their local currencies as they could have been otherwise.
That historic dollar-oil price relationship now appears to be broken. Crude is up 70% in 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 a balance of payments crisis in many oil-importing countries, particularly in Africa, Latin America and Asia.
Malawi, one of Africa’s poorest countries, recently devalued its currency by 25% in a single day. Sri Lanka, one of the poorest Asian countries, is on the verge of economic collapse. Mike Mueller, head of Asia at Vitol Group, the world’s largest oil trading house, said on Sunday: “The gap between the rich and countries that have little ability to pay for commodities is becoming increasingly stark.” Even those who can afford the local currency, such as those in Europe and Japan, suffer from increased inflationary pressures to pay for skyrocketing prices.
While Brent oil is down about 20% from its 2008 all-time dollar high, it is changing hands at record levels, when expressed in the local currency for countries that contribute about 35% of the world’s oil demand. .
India, the world’s third largest oil consumer after the US and China, is paying nearly 45% more than it was 14 years ago due to the huge depreciation of the Indian rupee against the dollar.
The eurozone currently pays around €111 per barrel, compared to €93.5 in July 2008. The UK faces a similar problem: Brent peaked at around £74 a barrel in 2008; Today, it is almost a third more expensive at £95. Japan is also hurting, with the Japanese yen hitting its weakest level against the dollar in two decades. The list of nations struggling to meet their energy bills goes on and on.
Record high oil prices in the local currency case for the energy market, beyond domestic economic shocks. Oil traders are looking for signs of demand destruction – the point at which higher prices reduce consumption. For now, oil demand growth remains strong, as the world emerges from the pandemic as consumption picks up. But with a large part of the world already facing record prices, demand is likely to ease soon. Analysts at Goldman Sachs Group expect the strengthening of the US dollar adding an additional approximately $20 a barrel, on average, when measured in local currencies, “to reach a level equivalent to $150/barrel Brent.”
For the OPEC+ oil cartel, the broken relationship between crude oil and the greenback offers a windfall advantage. In 2007, at a summit of the Organization of the Petroleum Exporting Countries in Riyadh, oil producers worried about the dollar’s collapse. The US Federal Reserve is set to raise interest rates more quickly than its central banking counterparts, with the US currency poised to continue riding higher – prompting oil cartels to work harder to keep a lid on crude prices. another reason.
Xavier Blass is a Bloomberg Opinion columnist covering energy and objects.