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Although Brent crude oil’s price has fallen about 25 percent from its high of $128 a barrel last March, oil importers are hard pressed to see much difference: the dollar has gained about 15 percent in value since then, forcing importers outside the U.S., including China, the European Union (EU), and India to still pay premium prices in their own currencies to settle their oil bills.
The dollar is the currency in which most of the world’s oil is bought and sold.
As a result, oil prices remain a key factor spreading inflation throughout national economies and driving up prices around the world at a time when central banks are raising interest rates, a separate factor driving up costs.
Europe, France, Germany, Italy, the Netherlands, and Spain are all dependent on imports for at least 90 percent of their oil.
Thanks to the dollar’s strength, and Russia’s almost complete end of its exports of natural gas to the EU, consumer prices overall are up 9.9 percent in the region, year on year.
China has imported less oil this year than last, largely due to its draconian anti-COVID lockdowns, but the value of that oil is higher now than then, according to Bloomberg.
“A strong dollar is a headwind for oil consumer nations whose currencies are not linked to the greenback,” commodity analyst Giovanni Staunovo at UBS Group said to Bloomberg.
“Over the last 12 months, oil prices have increased much more in local currency terms,” he pointed out.
India, whose rupee has shrunk by 11 percent against the dollar this year, has struck a deal with Russia to pay for Russian oil imports in its native currency. India’s government is trying to make similar bargains with Saudi Arabia and the UAE, Bloomberg said.
“If crude oil prices persist at current levels or rally further, this could result in trade deficits remaining wide, leading to further depreciation pressure on the rupee,” Divya Devish, currency strategist at Standard Chartered, warned in a Bloomberg interview.
Developing nations are being damaged the most.
Priced in Ghana’s cedi currency, Brent’s cost is at an all-time record. Sri Lanka has shut the nation’s only oil refinery because it cannot afford to buy oil. The island nation went bankrupt and the government collapsed earlier this year as food and fuel prices spiraled out of control.
Oil’s high dollar cost poses an additional, equally severe problem for emerging nations: having to spend more of their currencies to pay for oil, there is less with which to buy dollars to pay their dollar-denominated sovereign bonds.
More than a dozen low-income nations are poised to default on their debts, as we reported in “Strong Dollar Means Weakness in Emerging Nations” (11 Oct 2022).
TREND FORECAST: As the world sinks deeper into recession, demand for oil will slump.
However, prices are unlikely to fall significantly: OPEC+ is likely to scale back production in tandem with demand so as to maintain incomes and profit margins for producer nations.
In addition, U.S. oil majors have shown no sign of increasing production.
The companies did not increase investment in exploration and production as the COVID War waned and oil demand increased.
Instead, they showered cash dividends on shareholders and resumed buying back their own stock, as we reported in “Oil Majors Withhold Investment in New Production” (3 Aug 2021) and “Oil Majors Use Cash to Buy Back Stock, Increase Dividends” (10 May 2022).
As we have said previously, oil companies see a future in which their products are in less demand. Their strategy will continue to keep prices in a sweet spot that maximizes their returns without accelerating the global switch to renewable energy.
Also, should the Ukraine War continue to escalate and oil flows to Europe from Russia stop flowing completely, and/or tensions in the Middle East ramp up into military confrontations, we forecast oil prices to rise to the $120 per barrel range for Brent Crude.