There has been so much media space devoted to European Union gas supply problems and the associated ripple effect for developing economies that another fossil fuel issue has gone relatively unnoticed: oil prices. Oil prices have been on a general decline over the past two months, shedding around 30% from highs reached earlier this year, under pressure from expectations of a global economic slowdown.
The downturn itself has a strong causal link with energy prices, specifically oil and gas prices. And speaking of oil prices, despite the 30% drop in benchmarks, many buyer countries are facing a high bill for their oil imports, which would compound the challenge for their economies.
Take India, for example, one of the biggest oil importers in the world. A recent analysis in the Indian Express detailed that due to the oil price hike earlier this year, India’s trade deficit for the first half of the year had reached $150 billion and could double to $300 billion for the full year.
This, in turn, would cause a problem with the country’s balance of payments, as various parts of the economy would slow down due to rising oil prices, not only in India but also in the West. And speaking of the West, its European part has similar oil price issues as India.
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In a recent article on the problems of oil-importing countries, Bloomberg Noted that Europe was more than just a major importer of natural gas. The continent, and the EU in particular, also imports most of the oil it consumes, which means it is highly vulnerable to price fluctuations.
All major European economies, including Germany, Italy, Spain and France, according to the report, depend on imported oil for 90% of their consumption. And that means that, like India and China, the EU has a problem with the US dollar.
A rally in the greenback resulting from the Fed’s monetary policy tightening contributed significantly to the affordability problem that most oil importers have faced this year. Since most of the oil traded in the world is denominated in US dollars, the more expensive the dollar, even if the prices of oil themselves have not changed much, the higher the import bill for this oil would be high.
“A stronger dollar is a headwind for oil-consuming countries whose currencies are not pegged to the greenback,” Giovanni Staunovo, commodities analyst at UBS, told Bloomberg. “Over the past 12 months, oil prices have risen much more in local currency terms.”
This state of affairs could have major implications for the oil markets of tomorrow. These could be markets with a greater role for local currencies.
China, the world’s largest oil importer, has been trying for years to expand the use of its national currency in international trade. By a happy coincidence, its BRICS partner and main oil supplier, Russia, is very on board with the idea of local currencies, especially after the EU started shooting at it following the invasion of Ukraine.
Other developing countries, including India, are also considering replacing the global trade currency with their local currencies in bilateral trade agreements. India has even developed a mechanism for the settlement of international transactions in rupees, although it is still paying for Russian oil in US dollars.
This may be an emerging trend worth watching, but how it might play out in the European Union is another matter altogether. The EU has repeatedly declared its close alliance with the United States, particularly in the field of energy.
So moving away from the greenback for oil trade would probably be as bad an idea as President Macron’s accusations that the United States is using double standards by having gas prices at home lower than the price of LNG American companies sell to Europe.
Still, with the U.S. dollar’s important role in oil affordability amid what looks increasingly like a global economic downturn, other importing nations could get a boost for their plans to move away from it. and start using their local currencies more.
By Irina Slav for Oilprice.com
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