(Bloomberg) — Brent crude is down more than 30 percent from this year’s high, but you wouldn’t know it if you lived in Paris, Mumbai or Accra.
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The drop in the global oil benchmark from nearly $128 a barrel has been associated with a rise in the dollar of around 15% over the same period. This means that the price of fuel remains a significant factor driving up the cost of living in most of the world.
Oil-demanding powers such as China, India and the European Union saw smaller real-term declines in crude prices than benchmarks would suggest. And for some emerging markets, such as Sri Lanka, the impact of rising oil prices and currency collapse has already manifested itself in 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. “In the last 12 months, oil prices have risen much more in local currency.”
There is no easy solution. Raising interest rates to prop up the currencies risks slowing already fragile economies, while developing countries must count on dollar reserves.
Eurozone countries are highly dependent on oil imports. With almost no domestic supplies of crude, each of the currency bloc’s five largest economies — Germany, France, Italy, Spain and the Netherlands — depends at least 90 percent on foreign purchases to run refineries.
Against this backdrop, oil’s nominal dollar value has proved a particular headache for European Central Bank officials in what has already been a testing year. The squeeze on energy supplies from Russia’s efforts to cut gas supplies drove huge increases in consumer prices, hitting a record 9.9 percent in September.
Asian countries have felt similar pains. By August, the value of China’s oil imports was up 50% from a year earlier, despite lower overall volumes, as the country grapples with restrictions to stop the spread of Covid-19.
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Bank of Korea Governor Rhee Chang-yong complained last month that his currency’s weakness was negating the benefits of lower oil prices. Both Korea and Japan have at times tried to shield consumers from the pain of higher fuel prices by offering subsidies — effectively shifting some of the burden to the government.
The strain on the strong dollar has prompted India to reach out to trading partners including Saudi Arabia, Russia and the United Arab Emirates to switch transactions to local currencies. The rupee has fallen about 11 percent against the dollar this year.
“If crude oil prices persist at current levels or rise further, this could lead to the maintenance of large trade deficits, leading to further depreciation pressure on the Indian rupee,” said Divya Devesh, currency strategist at Standard Chartered.
Although dollar pressure is widespread, emerging economies are feeling the most acute pain. Priced in Ghana cedis, Brent crude is not only above where it was trading in March, but at a record high.
Spiraling fuel prices and foreign exchange shortages create a toxic mix for some. Sri Lanka recently closed its only oil refinery because it could not pay for crude oil. The country effectively went bankrupt during the summer as it struggled to finance food and fuel imports.
While developed countries have more leeway to absorb currency changes, “there are certainly emerging markets that will experience balance of payments problems as a result of high oil prices,” said Caroline Bain, chief commodity economist at Capital Economics .
–With assistance from Heesu Lee, Clarissa Batino, Michael Heath, Craig Stirling, Zoe Schneeweiss, Sarah Chen, April Ma, Toru Fujioka, Karthikeyan Sundaram, Debjit Chakraborty and Sam Kim.
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