Just over 50 years ago, at a meeting of the world's top economic powers, U.S. Treasury Secretary John Connery shocked other nations by declaring that the dollar "is our currency, but it's your problem." Half a century later, the global economy faces the opposite challenge: The dollar is hovering at 20-year highs against other major currencies, creating huge problems for everyone outside the U.S. buying dollar-denominated commodities like crude oil. No commodity is more important than crude oil.

The dollar has become the king of global energy and commodity markets since Connery made it a problem for other countries. From oil to wheat to copper, the price of nearly every raw material the world consumes today is denominated in dollars. Even the typical British beverage tea is today denominated in dollars rather than pounds.

Usually, a strong dollar means weaker commodity prices and vice versa. The commodity-dollar relationship tends to act as a buffer for the global economy, offsetting each other, which is especially important for the world's poorer countries that struggle to pay their dollar-denominated import bills.

In fact, the last time the world faced a surge in oil prices was a prime example of a symbiotic relationship. In 2008, the price of Brent crude soared to an all-time high of $147.50 a barrel, straining the finances of many countries. But that same year, the dollar fell to a record low against the currencies of America's major trading partners, easing some of the pain from rising oil prices globally. Crude imports have become expensive for many oil-importing countries, but not as expensive in local currency as they would otherwise be.

This historic dollar-oil relationship now appears to be broken. Crude oil prices have risen 70% in the past year and are now trading around $120 a barrel. Meanwhile, the dollar has gained 10% since mid-2021. This has created a balance of payments crisis in many oil-importing countries, especially in Africa, Latin America and Asia.

Since the beginning of 2022, Brent oil prices (in U.S. dollars) have risen by 24%. However, taking into account the depreciation of the exchange rates of some countries or regions, the crude oil prices denominated in euros, renminbi, Indian rupees and Japanese yen rose by 37%, 31%, 32% and 47% respectively. More extreme, oil prices in Sri Lankan rupees rose by 120%. Among them, the price of crude oil denominated in euros hit a record high. If you take into account the crack spread of refined oil products that hit a record high after the Russian-Ukrainian war, the price of refined oil products denominated in each country's local currency will increase even more.

India, the world's third-largest oil consumer after the United States and China, is paying about 45 percent more than it did 14 years ago as the Indian rupee has depreciated sharply against the dollar.

The euro zone is currently paying around 111 euros a barrel, compared with 93.5 euros in July 2008. The UK faces a similar problem: Brent reached around £74 a barrel in 2008; today it is almost a third more expensive at £95. Japan was also hurt as the yen fell to its weakest level against the dollar in two decades. The list of countries struggling to meet their energy bills goes on and on.
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In addition to domestic economic aftershocks, record-high oil prices in local currencies are also important for the energy market itself. Oil traders are looking for signs of demand destruction -- the point at which higher prices lead to less consumption. For now, oil demand growth remains strong, helped by pent-up consumption as the world emerges from the pandemic. But with a large part of the world already facing record prices, demand could soon suffer.


For OPEC+, the breakdown in the relationship between crude oil and the U.S. dollar provided a windfall. At an OPEC summit in Riyadh in 2007, oil producers feared the dollar would collapse. As the Federal Reserve prepares to raise interest rates further and faster than its central bank peers, the dollar looks set to continue to rise - another reason why oil cartels are working harder to control crude prices. On the other hand, it was believed at the time that the dollar's role as the world's reserve currency would soon wane, but a surge in the dollar was likely to prompt countries to speed up their search for alternative currencies.

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