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Steep Oil and Strong Dollar Make Toxic Brew for Global Economies
For Americans, rising oil prices are threatening $3-a-gallon gasoline and pushing up prices for plane tickets. In many other parts of the world, today’s crude rally is more painful—sparking protests, gas lines and emergency subsidies to quell unrest.
That is because many consumers outside the U.S. face a double whammy when—like now—the dollar gets stronger at the same time that oil prices rise. While petroleum is produced all over the globe, when it is sold to refiners and other buyers it is almost always priced in dollars.
It is, in the words of Brazilian Finance Minister Eduardo Guardia, “a challenging external scenario.”
After Brazil’s military brought an end to a crippling strike by truck drivers over high fuel prices, Mr. Guardia called the oil rally “brutal” for his country.
Brazil is among the handful of oil-dependent countries in Latin America and Southeast Asia that have turned to costly fuel subsidies. Across swaths of Africa, higher fuel costs and weakening local currencies have hit prices for food and electronics.
Fast-rising crude, on its own, has been pressuring global growth for months. Swiss bank UBS figures that today’s international crude price, around $75 a barrel, would boost global inflation by more than half a percentage point, compared with the $50 barrels the world enjoyed as recently as last year.
Brent crude, the international benchmark, has eased off a recent 3½-year high of around $80, on expectations that the Organization of the Petroleum Exporting Countries will boost output when it meets this week. Before that retreat, oil was up more than 20% this year.
There are global winners, along with losers. The U.S., squeezed over the decades in past oil rallies, is looking pretty comfortable this time. In recent years, America has boosted production significantly, making it much less dependent on imports.
Overall economic growth in big crude producers like the U.S. and Canada could rise by almost a third of a percentage point with today’s prices, says UBS.
In import-heavy economies like China and the eurozone, however, growth could slip a tenth of a percentage point, UBS figures.
That may not sound like a significant hit overall, but fuel prices can be particularly painful for specific swaths of any economy. This month, Chinese truckers refused to move goods and blocked roads in a handful of cities, protesting higher fuel costs.
Exacerbating the pain in many countries is a strengthening dollar. The WSJ Dollar Index, a measure of the dollar compared with a basket of 16 major currencies, has strengthened 6% since February.
In Europe, dollar strength against the euro has helped make crude today about 30% more expensive than when oil was at a low in February.
For European consumers, gasoline-price shocks are often dampened by the continent’s generally steep taxes on the fuel. That makes the cost of oil a smaller percentage of the overall price of a liter of gas.
This year’s price increase, though, has been so steep that many drivers are feeling the squeeze. Gasoline prices in Britain rose faster in May than in any month on record, according to RAC, a drivers’ lobby group, which called it a “hellish month.” A lower pound against the dollar and higher oil prices were a “toxic combination,” an RAC spokesman said.
“I fill up two or three times a week. I feel it,” said Cristinel Bulai, an Uber driver in London. “When, in one year, every month you see a little bit more, you say, ‘whoa, whoa.’”
Brent crude is still well below the $100-plus a barrel it fetched from 2011 through 2014, and prices probably aren’t high enough to knock the European economy from its recent upward trajectory.
Still, the oil and dollar rally act like a tax, limiting consumers’ discretionary spending. That threatens a pullback in consumption that can eventually hit growth. It can also feed into inflation and pressure central banks to boost borrowing rates. Inflation in Spain jumped to an annualized 2.2% last year from minus 0.2% in 2016, largely due to higher energy prices.
The pain has been greatest in economies where dollar strength has been even more pronounced. In Brazil, gasoline is up 28% and diesel fuel for trucks more than 27% over the past year. The Brazilian real has fallen 11% this year against the dollar.
The two-week strike by Brazilian truckers stranded goods across the country, triggering warnings about possible shortages from grocery stores, hospitals and McDonald’s outlets. To end the walkout, President Michel Temer rolled out the military and promised truckers $3 billion in diesel-fuel subsides and tax cuts.
Brazil’s government has restricted how often fuel suppliers can raise prices, at once a month. As energy prices rose, economists polled by the central bank slashed a full percentage point of growth off Brazil’s forecast output this year, to 2%.
In Indonesia, where the rupiah has fallen to its weakest level against the dollar in more than two years, fuel prices are an election issue. President Joko Widodo has promised not to raise prices of subsidized fuels and electricity through 2019, when he is expected to run for a second term. In April, he required fuel retailers, including foreign firms Royal Dutch Shell PLC and Total SA, to seek government approval before raising prices they charge at the pump.
Jakarta also said it would dramatically increase diesel subsidies. Thailand and Malaysia—where newly elected Prime Minister Mahathir Mohamed made it a campaign pledge—have both ramped up spending to stabilize pump prices.
“Governments are promising to cap fuel prices to win votes and elections,” said Hak Bin Chua, an economist at Maybank Kim Eng in Singapore.
While Africa is a big oil producer, much of the continent is energy-poor and dependent on imports—and several governments are also contending with pressure on their currencies. In Nigeria, the continent’s biggest crude exporter, a government cap on what drivers pay at the pump has led to gasoline shortages as retailers struggle to pay for refined fuel imports.
In Sudan, the ninth-largest African economy, street protests have broken out over soaring bread prices, pushed up by the rising costs of delivery and wheat imports. Fuel prices have soared fivefold in recent months, bringing weeks of long, overnight lines at gasoline stations across Khartoum and other cities, as the government struggles to pay for fuel imports.
Hussein Adawi, a sugar importer, said he and his rivals also face higher operating costs as they spend time sourcing dollars to finance both fuel purchases and sugar imports. Sometimes that takes several weeks for a single shipment.
“We can’t even get fuel to deliver supplies to customers,” he said.
23 Comments on "Steep Oil and Strong Dollar Make Toxic Brew for Global Economies"
Shortend on Sun, 17th Jun 2018 9:19 am
Always something amiss…can’t make any money if everything is stable…
BobInget on Sun, 17th Jun 2018 10:44 am
Few seem to grasp the situation.
With Venezuela heading for zero exports before years end. With land based Saudi production
down for the 3rd year With ChinIndia up OVER
6% for year. With Nigerian labor’s exploding pipelines. Demand can’t be met.
To make matters worse, investors can read.
Oil Market Sentiment (from ‘Energy Investing’).
“I just looked at conservative debt clock for USA.
Shows 21.1 TRILLION .. The real kicker on the clock, unfunded liabilities per tax payer $113.6 trillion, $937,000 /taxpayer
Year ago, each taxpayer was about $820,000…
These numbers are much worse that they appear.
If taxpayer that is cash flow positive,
that number is probably about $1.2 million for every taxpayer.
You can tell USA is really in big trouble because we’ve stalled critical infrastructure indicated by the Engineering Assoc.
If Trump stays in long enough the fed one will balloon to $30 trillion in no time.
This is why they have not raised rates for about 12 years . They can raise them ..but
i think that would cause a complete collapse ..and for whom ..to pay interest on the total unfunded liabilities of $113 trillion ?
Makes one wonder why US even holds reserve currency?
Not just me that sees this ..hence Bitcoin ..
I think this debt clock does not reveal the true story. Its much worse.
http://www.usdebtclock.org/
BobInget on Sun, 17th Jun 2018 10:48 am
note I omitted ‘demand’ as in “Chinese and Indian
‘demand’.
BobInget on Sun, 17th Jun 2018 10:59 am
If USD, little by little then, ‘all at once’ USD
goes completely bonkers, hyper inflation, US loses ‘reserve currency status’.
This alone will be catastrophic. President Putin will have accomplished what no dictator before
managed to do.
Money well spent Vladimir.
Davy on Sun, 17th Jun 2018 11:53 am
“If USD, little by little then, ‘all at once’ USD goes completely bonkers, hyper inflation, US loses ‘reserve currency status’.”
Come on bob is this going to happen in a vacuum? Who’s currency will fill the void? You anti-American/anti-dollar people don’t ever have those answers. It is mostly emotional and short on the intellectual.
print baby print on Sun, 17th Jun 2018 1:35 pm
Davy nobody will fill the void that is why this charade last so long you know that very well I am sure . It will be ugly for everybody, but its our fault ( humans)
onlooker on Sun, 17th Jun 2018 1:40 pm
https://srsroccoreport.com/areas-of-the … -collapse/
Underscoring, that Asia and Europe may be most vulnerable to collapse because of their large dependence on net oil imports
JuanP on Sun, 17th Jun 2018 1:48 pm
Delusional Davy “Come on bob is this going to happen in a vacuum? Who’s currency will fill the void? You anti-American/anti-dollar people don’t ever have those answers. It is mostly emotional and short on the intellectual.”
More bullshit from the board’s American exceptionalist who can’t entertain the idea that the American economy and the US Dollar can collapse, and the rest of the world be better of for it.
Boat on Sun, 17th Jun 2018 1:52 pm
Onlooker
Not to mention N America is energy independent. Let the ungrateful world swim in their own problems. Pull the US troops in the middle east and leave oil security to EU and China.
Mexico just whipped Germany in soccer. They might just whip-em with their economy. Lol
Davy on Sun, 17th Jun 2018 2:01 pm
“Davy nobody will fill the void that is why this charade last so long you know that very well I am sure . It will be ugly for everybody, but its our fault ( humans)”
I agree print but my question is when.
MASTERMIND on Sun, 17th Jun 2018 2:52 pm
Boat
You think the US can survive with its ‘service economy” without Asia and the rest of the OECD..You are so dumb its almost unbelievable..
onlooker on Sun, 17th Jun 2018 2:56 pm
Yes, Boat, this world Economy is a row of Dominoes. When one falls, they all will
MASTERMIND on Sun, 17th Jun 2018 3:01 pm
Onlooker
My brother from another mother..Thank you..
print baby print on Mon, 18th Jun 2018 12:35 am
Davy I am searching answer on that question too.A lot of people smarter then me have failed on that question, so I want even say what I think when
GregT on Mon, 18th Jun 2018 1:23 am
“I agree print but my question is when.”
“Davy I am searching answer on that question too.A lot of people smarter then me have failed on that question, so I want even say what I think when”
Sunday November the 23rd, 2025, at precisely 8:37:52 PM, the entire world will implode in on itself. People much smarter than both of you guys put together already passed on that question.
Makati1 on Mon, 18th Jun 2018 1:49 am
Gee, Greg, I thought it was Monday, November the 23rd, 2025, at precisely 8:37:52 AM. Oh, that’s right. My time is 12 hours ahead of US EST. lol
print baby print on Mon, 18th Jun 2018 9:00 am
I have a suggestion . Why all corns and techs dont leave this site and leave it to us doomers and peakers it is peak oil after all. They only get nervous how stupid we are . So do yourself a favor and go to some corn site and enjoy yourself and insult people there. Hahahha i am kidding it would be boring
print baby print on Mon, 18th Jun 2018 9:04 am
but I must admit sometimes you are pain in the butt until I find someone knowledgeable, luckily I am here for so long and I know exactly what I am looking for. Unfortunately a lot of new people waste a lot of time and even give up on comments pitty
Davy on Mon, 18th Jun 2018 9:14 am
yea, print, some of them that come here to attack doomers are definitely having some “I wonder” moments and try to make arguments that make them think they feel better.
print baby print on Mon, 18th Jun 2018 9:17 am
beside oil and printing presses this is a fundamental problem also https://finance.yahoo.com/m/83e3919b-b69e-39f7-a355-a30a557b9181/ss_the-supply-and-demand-model.html
Outcast_Searcher on Mon, 18th Jun 2018 1:28 pm
Meanwhile, JaunP, Cassandras cry about the US dollar whether is is rising or falling, and claim “doom” in either situation.
This has been going on for quite a few decades, and not a US collapse in sight.
So how credible is constantly predicting US collapse will happen any time now?
MASTERMIND on Mon, 18th Jun 2018 2:09 pm
Outcast_Searcher
Just wait till the oil shortage hits and hyper inflation kicks in..
Sleepwalking Into The Next Oil Crisis
https://www.forbes.com/sites/rrapier/2018/03/23/is-the-world-sleepwalking-into-an-oil-crisis/#509edc8b44cf
onlooker on Mon, 18th Jun 2018 2:24 pm
MM, OS is a renewable/EV disciple probably worse than Clog, you are treading rubber with him