I remain confident there will be relief on the price of oil soon enough (the US is pumping like mad and soon Russia and Saudi Arabia may be too), but there is no relief in sight coming for economies which are being crushed by the strong dollar as the Fed has continued signalling its intentions to keep raising interest rates. And while oil prices may come down soon in the future, the inflated oil prices are causing massive chaos in the emerging markets right now:
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.
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.
We are doing okay because America is rich compared to the rest of the world and can absorb some oil price shocks. We are also benefiting economically from the price surge with more and more oil shale production coming on line and oil companies hiring Americans like crazy. This is a key component of the recent US labor shortage.
However, in much of the rest of the world, this isn’t the case. Many countries subsidize gasoline sales and have debt denominated in US dollars, which are getting more expensive nearly every day while their own currencies depreciate. As oil soars, the subsidies are getting more expensive, right at the time when these government are facing increased liquidity constraints from the rising US dollar.
Despite what “free traders” like to tell people, there are winners and losers on trade, and right now we are on the winning side while most of the rest of the globe goes through some very painful adjustments. Let’s hope we stay there.