Home Market Crude oil shock has started roiling emerging markets

Crude oil shock has started roiling emerging markets


With Brent crude surging north of $85 a barrel and some analysts warning that $100 is just around the corner, its comforting to remember that were still a long way from 2008, when oil hit an alltime record of $147.50.

Comforting, but wrong. For much of the worlds population, were already at or near the worst levels endured during the 2008 price spike.

While dollar Brent still looks relatively subdued compared to its frenzy a decade ago, its a different story when priced in emerging-market currencies. In Brazilian reais, oil blasted through its 2008 record back in March and is now nearly 50% more costly. In Mexican pesos, Brent overtook that years levels back in May; and within the past month Polish and South African prices have also moved above their decade-ago peaks. India and Indonesia arent far behind.

With emerging-market currencies falling against the greenback, the rising dollar price of crude is compounded for consumers in less wealthy countries. This dynamic helps explain why Brazil went through a crippling truck-drivers strike in May. It also sheds light on the recent political rise of far-right populist Jair Bolsonaro, who could be within sight of presidency in elections that begin Sunday after backing the protests.

In Mexico, it contributed to the political rebirth of Andres Manuel Lopez Obrador, who won the July 1 presidential election on the back of a promise to hold fuel prices in real terms for three years by building more refineries and increasing subsidies. The same electoral wave could threaten India, too.

Thanks to price deregulation and an array of additional taxes imposed on retail fuels during the oil-price slump since 2014, the cost of filling up in Indias cities is at record levels. The country has some of the least affordable transport fuel in the world, with a gallon of gasoline costing more than three-quarters of the average daily income and almost as much as it would set you back in Tokyo.

Some countries have mechanisms in place to soften this blow. The worlds governments handed out $105 billion of oil subsidies in 2016, according to the International Energy Agency – a figure thats likely to have risen substantially since then, given how cheap crude was two years ago. These measures tend to mollify consumers, but the costs dont go away.

In Venezuela, gasoline still costs just 1 cent a litre, but the extreme disparity with neighbouring countries fuels an epidemic of smuggling and organised crime along its borders.

A more widespread issue is the damage those subsidies do to government budgets, especially as they ratchet higher when the currency falls, forming a vicious circle.

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