There has been so much media space dedicated to the gas supply troubles of the European Union and the associated spillover effect for developing economies that another fossil fuel problem has remained relatively unnoticed: oil prices. Oil prices have been on a general decline over the past couple of months, shedding about 30 percent from the peaks reached earlier this year, pressured by expectations of a global economic slowdown.
The slowdown itself has a close causal link with energy prices, more specifically, oil and gas prices. And speaking of oil prices, despite the 30-percent drop in benchmarks, many buying nations are facing a steep bill for their oil imports, which would aggravate the challenge for their economies.
Take India, for instance—one of the world’s biggest oil importers. A recent analysis in the Indian Express detailed that because of the oil price rally from 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 would, in turn, cause a problem with the country’s balance of payments as various parts of the economy slow down due to higher oil prices, not just in India but in the West as well. And speaking of the West, its European part has similar oil price problems to those that India has.
In a recent article on the troubles of oil-importing nations, Bloomberg noted that Europe was more than just a major importer of natural gas. The continent, and the EU specifically, also imports most of the oil it consumes, meaning it is highly vulnerable to price swings.
All the big European economies, including Germany, Italy, Spain, and France, the report said, depended on imported oil for as much as 90 percent of their consumption. And this means that, like India and China, the EU has a problem with the U.S. dollar.
A rally in the greenback resulting from tighter monetary policies at the Fed contributed significantly to the affordability problem that most oil importers have been struggling with this year. Since most of the oil traded around the world is priced in U.S. dollars, the more expensive the dollar, even if oil prices themselves haven’t changed much, the higher the import bill for this oil would be.
“A stronger dollar is a headwind for oil consumer nations whose currencies are not linked to the greenback,” Giovanni Staunovo, commodity analyst at UBS, told Bloomberg. “Over the last 12 months, oil prices have increased much more in local currency terms.”
This state of affairs might have major implications for the oil markets of tomorrow. They might be markets with a bigger role for local currencies.
China—the world’s largest importer of oil—has been trying to expand the use of its national currency in international trade for years. By a happy coincidence, its BRICS partner and major oil supplier, Russia, is very much on board with the idea of local currencies, especially so after the EU began shooting sanction packages at it following the invasion of Ukraine.
Other developing nations, including India, are also entertaining the idea of replacing the global trade currency with their local currencies in bilateral trade deals. India has even developed a mechanism for international deal settlement in rupees, although it is still paying for Russian oil in U.S. dollars.
This might be an emerging trend worth watching, but how it could play out in the European Union is an entirely different matter. The EU has time and again declared its close alliance with the U.S., especially in energy.
So, moving away from the greenback for oil trades would probably be as bad of an idea as President Macron’s accusations that the U.S. is employing double standards in having lower gas prices at home than the price of the LNG that U.S. companies sell to Europe.
Yet, with the U.S. dollar’s important role in the affordability of oil amid what is increasingly looking like a global economic slowdown, other importing nations might get a boost for their plans to move away from it and start using their local currencies more.