The oil industry has been the cornerstone of the economy of the United States as well as its foreign policy, and now, the currency is threatening to weaken it. In the last few weeks, the US Energy Information Administration has filed some reports stating that the prices of benchmark crude oil fell to $70 per barrel for Brent and $67 for a barrel for West Texas Intermediate. These were priced at $80 and $75 respectively.
What is worrying is that these reports come just a few months after the predictions that the benchmark crude prices would soar in the upcoming year. But considering everything that is going on – President Donald Trump’s tariffs on certain goods as well as the rise of the dollar – this is going to slow down the oil industry on a global level.
And if we scratch under the surface, you get to see how tariffs are affecting the emerging markets. When Washington introduced steel and aluminum tariffs as well as duties on solar panels and washing machines, for instance, countries such as China, Turkey, and South Korea responded by devaluating their currencies, effectively making the exports less costly.
“Suppose you were exporting something for $100 before the tariffs, then President Trump says we’re going to put on a 25-percent tariff – if you devalue your currency by 20 percent, that brings you back to close to $100,” says Steven Kopits, president of Princeton Energy Advisors, a consulting firm. “So there’s a natural tendency that countries depreciate their currency to maintain the transactions.”
What we have as a result is the more expensive US dollar, by comparison. As we know, the crude oil is traded in dollars, which means that oil becomes costlier to import and that will lower the demand and slow down the countries that chose to devalue their currencies to counter Trump tariffs. This transfers to the economic slowdown for the global market and can backfire and affect the US economy as well.
“This is one of those things where, can I go over and set my neighbor’s house on fire? Sure, you could. Does it mean that my house won’t burn down? Well it might not, but it could burn down your house, too,” Kopits says. “So if you set your neighbor’s house on fire, you probably have a problem.”
“The reaction within 60 minutes of this EIA release was wave after wave of selling,” Tom Kloza, head of global energy analysis at Oil Price Information Service, wrote after last week’s EIA analysis. “There have been several false ‘dive’ alarms sounded this summer, but this particular report may be the one that inflicts more lasting damage.”
Although the US stockpiles of crude oil have gone up, the oil used to keep the refineries that are running at a breakneck pace and crude exports are going down. “This is very bullish, as it suggests U.S. refiners anticipate strong refined product demand, either domestically or via exports,” Kopits says.
We have witnessed recent declines, but the oil prices are still on the highest points since the fall of 2014. According to Kloza, the EIA’s recent bulletins might seem “to cast plenty of doubt on crude oil and product prices headed into the final third of the year,” but they can “sometimes be taken too seriously.”
“I do believe the currency aspect of oil prices has been understated as of late,” Patrick DeHaan, head of petroleum analysis at GasBuddy.com, writes in an email. “As we prepare for the conclusion of the U.S. summer driving season, the largest seasonal consumption in the world, oil prices may remain under [downward] pressure for the early fall. I can’t think of a time in the past that such policy has played such a role in oil prices globally, and this doesn’t look like it will end soon as the U.S. lashes out against multiple trading partners, cutting into the strength of their currency, and leading the dollar to higher ground.”