Oil, The Petrodollar, And The Next Emerging Market Crisis

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by John Rubino, Dollar Collapse:

Oil prices are up over the past year, which is bad if you’re, say, a developing country that imports a lot of the stuff. But the US dollar (aka the petrodollar) is also up, which compounds the problem because oil is priced in dollars. So Brazil, for instance, finds itself buying an appreciating necessity that’s priced in an appreciating currency. The result is serious trouble for at least some countries in that position. From Saturday’s Wall Street Journal:

Steep Oil and Strong Dollar Make Toxic Brew for Global Economies
‘Brutal’ rally in dollar-priced crude hammers governments, strains consumers from U.K. to Brazil.

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.

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