BRENT oil has dropped more than 30 per cent 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 US$128 a barrel has dovetailed with a jump in the dollar of about 15 per cent 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 per cent dependent on foreign purchases to run refineries.

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Against that backdrop, the dollar denomination of oil has proven to be a particular headache for European Central Bank officials in what has already been a testing year. The squeeze on energy supplies from Russia’s moves to cut gas deliveries has driven huge increases in consumer prices, running at a record 9.9 per cent in September.

Asian countries have been feeling similar pain. Through August, the value of China’s oil imports was up 50 per cent from a year earlier, despite overall volumes being lower as the country wrestles with restrictions to stop the spread of Covid-19. 

Bank of Korea Governor Rhee Chang-yong complained last month that his currency’s weakness is canceling out the benefits of lower oil prices. Both Korea and Japan have at times sought to shield consumers from the pain of higher fuel prices by offering subsidies – effectively transferring some of the burden to the government.

The strain of the strong dollar has prompted India to reach out to trade partners including Saudi Arabia, Russia and the United Arab Emirates to shift deals to local currencies. The rupee has fallen about 11 per cent against the dollar this year.

“If crude oil prices persist at current levels or rally further, this could result in trade deficits remaining wide, leading to further depreciation pressure on the Indian rupee,” said Divya Devesh, a currency strategist at Standard Chartered.

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. BLOOMBERG