Even as winter weather looms for the northern hemisphere, global oil prices continue to drop. In the five months since West Texas Intermediate (WTI) crude peaked at nearly $107 per barrel, the price has dropped 28% to around $77 per barrel. Weak demand and strong supplies globally are driving prices lower, despite ongoing political turmoil in the Middle East. This is having a mixed effect on various countries, depending on whether they are oil exporters or importers.
For oil exporters, falling oil prices are having an immediate impact on those countries’ currencies in the foreign exchange markets, particularly against the U.S. dollar, since oil trades in dollars. Russia, the largest crude oil producer in the world, has seen the ruble depreciate by nearly 25% against the U.S. dollar since mid-June. In addition to the loss in export revenue due to lower oil prices, the pessimistic outlook for Russia also stems from trade sanctions placed by the U.S. and European Union.
Canada is the world’s fifth largest crude oil producer, and the Canadian dollar has depreciated by 4% in the last five months. Norway ranks much lower on the list in terms of global oil production, but crude oil makes up approximately one-third of Norway’s total exports, and petroleum activities and ocean transport represent nearly one-quarter of Norway’s GDP. Because of this dependency on oil, the Norwegian krone has depreciated by 11% against the U.S. dollar since oil prices peaked.
The U.S. Energy Information Administration ranks Japan as the third largest net oil importer in the world, after the United States and China. Normally the Japanese yen would be getting a boost to its currency from the drop in oil prices, but domestic economic issues are taking precedence at this time. The economy shrank by 1.8% in the second quarter compared to the first quarter as consumers pulled back following a sales tax increase; a second tax increase aimed at combatting deflation and reducing the country’s debt load is now in doubt, as is Prime Minister Shinzo Abe’s broad economic growth strategy. The yen has depreciated by 11.3% against the U.S. dollar over the last five months, while only depreciating by 7.6% against the Canadian dollar and 3.7% against the euro.
In the United States, consumers are enjoying the perceived income boost from lower gasoline prices due both to falling oil prices and slower demand growth. Gas prices have fallen by more than 25% since April of this year, to a nearly four-year low. This is a welcome economic bonus for consumers, who now have money to spend elsewhere; retailers are hoping to benefit as we head into the all-important holiday shopping season. Analysts surveyed by FactSet expect the price of WTI crude to remain below $90 per barrel through 2016; this could have a prolonged impact on the economic outlook for various countries.