Analysis | In The Oil Market, A Strong Dollar Is The World’s Problem

Since Connally made the dollar everyone else’s trouble, the greenback has been king of the global energy and commodities markets. The prices of almost every raw material the world consumes today, from oil to wheat to copper, is measured in dollars. Even tea, the quintessential British drink, is priced in US currency, not the British pound.

Usually, a strong dollar means weaker commodity prices – and vice versa. The commodity-dollar relationship tends to act as a buffer to the global economy, one offsetting the other, which is especially important for poorer countries. The last time the world faced high oil prices was a pattern of symbiosis. In 2008, the price of Brent oil rose to an all-time high of $147.50 per barrel, causing financial stress in many countries. But that same year, the dollar fell to a record low against the currencies of major US trading partners, easing some of the pain. For many importing countries, oil becomes expensive, but not exorbitantly expensive in local currency.

The US dollar-oil price historical relationship now appears to have broken down. Crude oil is up 70% over the past year and now trades at around $120 a barrel. At the same time, the dollar has gained 10% since mid-2021. That created a balance of payments crisis 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 recession. Mike Muller, Asia head of Vitol Group, the world’s largest oil trader, said: become extremely serious”. Even those who can afford to pay sky-high prices in local currencies, such as Europe and Japan, are suffering from rising inflationary pressures.

While Brent is about 20% below its 2008 all-time high, it is changing at record levels when expressed in local currency for countries that account for about 35% of demand. world oil demand. India, the world’s third-biggest oil consumer after the US and China, is paying about 45% more than it did 14 years ago as the rupee depreciates sharply against the dollar. The eurozone now pays around 111 euros ($119) per barrel, compared with 93.5 euros in July 2008. The UK faces a similar problem: Brent peaks around £74 ($92) la) per barrel in 2008; today it’s almost a third more expensive at £95. With the yen falling to a two-decade low against the dollar, Japan is also hurting. The list of countries struggling to meet their energy bills goes on.

In addition to the domestic economic aftershocks, record high oil prices in local currency hit the energy market. Oil traders are looking for signs of demand destruction – a time when higher prices lead to reduced consumption. For now, oil demand growth remains strong, fueled by pent-up consumption as the world emerges from the pandemic. But with a significant portion of the world already facing record prices, demand will soon take a hit. Analysts at Goldman Sachs Group Inc. thinks the US dollar’s strength is adding up by an average of around $20/bbl when measured in local currency, “reaching the equivalent of $150/bbl of Brent”.

For the OPEC+ oil group, the fractured relationship between crude oil and the greenback provides a headwind. In 2007, at an OPEC summit in Riyadh, oil-producing countries worried about the collapse of the dollar. With the Federal Reserve poised to raise interest rates faster and faster than its central bank peers, the US currency looks set to continue to soar – another reason why oil corporations mines work harder to lower prices.

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This column does not necessarily reflect the opinions of the editorial board or Bloomberg LP and its owners.

Javier Blas is a Bloomberg Opinion columnist on energy and commodities. A former Bloomberg News reporter and commodities editor at the Financial Times, he is the co-author of “The World For Sale: Money, Power, and the Traders of Earth’s Resources.”

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