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Page added on October 22, 2022

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The world’s oil buyers are being crushed by a surging dollar


Brent oil has dropped more than 30% from this year’s high, but you wouldn’t know it if you live in Paris, Mumbai or Accra.
The decline in the global oil benchmark from nearly $128 a barrel has dovetailed with a jump in the dollar of about 15% over the same period. That means fuel prices remain a significant factor driving up the cost of living across most of the world.

Oil-demand powerhouses like China, India and the European Union have all seen smaller real-term declines in crude prices than benchmarks would suggest. And for some emerging markets like Sri Lanka, the impact of a spiraling oil price and collapsing currency has already shown up in the form of near-total economic collapse.

“A stronger dollar is a headwind for oil consumer nations whose currencies are not linked to the greenback,” said Giovanni Staunovo, commodity analyst at UBS Group AG. “Over the last 12 months, oil prices have increased much more in local currency terms.”

There’s no easy fix. Lifting interest rates to bolster currencies risks slowing already-fragile economies, while developing countries need to keep an eye on dollar reserves.

Euro-zone countries are highly dependent on imports for their oil. With next to no local crude supplies, each of the currency bloc’s five biggest economies — Germany, France, Italy, Spain and the Netherlands — is at least 90% dependent on foreign purchases to run refineries.

Currency Pain | The strong dollar cancels out much of the benefit of falling oil prices
Though pressure from the dollar is widespread, emerging economies are feeling the most acute pain. When priced in Ghana’s cedi, not only is Brent oil above where it was trading in March, but at a record.

Spiraling fuel prices and foreign exchange shortages is creating a toxic mix for some. Sri Lanka recently shut its only oil refinery because it couldn’t pay for crude. The country effectively went bankrupt over the summer as it struggled to finance food and fuel imports.

While developed countries have more leeway to absorb currency shifts, “there are definitely emerging markets that are going to see balance-of-payments problems as a result of high oil prices,” said Caroline Bain, chief commodities economist at Capital Economics.

The Economic Times

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