Can the global economy withstand a $100 per barrel oil price next year? Because a triple-digit price wouldn’t just mean higher energy prices but also a stronger dollar. The combination of expensive barrels and a rising greenback could turn crude oil into a wrecking ball in 2024, keeping inflation at a sufficiently high level to disrupt growth worldwide.
The link between oil and the dollar is American inflation. As gasoline and diesel retail prices rise in the United States, they could exacerbate domestic inflationary pressures in other sectors, convincing the Federal Reserve to keep interest rates higher for longer or even continue raising them.
In some ways, the world’s oil central banker, Saudi Energy Minister Prince Abdulaziz bin Salman, and the dollar’s central banker, Jerome Powell, are working hand in hand. The result could be a slowdown in oil demand growth in 2024.
Japan may be the best example of the oil-currency mix. The yen is at its weakest exchange rate against the greenback in nearly 35 years, making refined petroleum products a small luxury. Last month, the Japanese government was forced to extend fossil fuel subsidies until the end of the year after the nationwide retail gasoline price reached a record level of 186.5 yen ($1.24) per litre, surpassing the peak set in 2008.”
For now, the countries most affected by this toxic mix are emerging economies. Oil traders believe there is no strong indication that global demand is severely impacted. Certainly, petroleum consumption has slowed in West Africa, but the primary reason is the removal of subsidies in Nigeria. Elsewhere, demand remains healthy.
However, if prices remain close to their current levels, the pain will slowly be felt in the engines of global demand, especially in India. As the rupee steadily loses value against the dollar, New Delhi notes that oil is more expensive in local currency than when it reached $150 per barrel in 2008.
Another unrecognized problem for emerging markets like India and China is that the benefits of their non-aligned oil policies are ending. For most of 2022 and early 2023, New Delhi and Beijing had access to cheaper crude by buying barrels at significantly reduced prices from Iran, Venezuela, and Russia. India and China reaped economic benefits by refusing to take sides in the Ukraine conflict. However, the discounts offered by Tehran, Caracas, and Moscow have significantly diminished since then. Russian flagship Urals crude, for example, sold in early 2023 at nearly $40 per barrel below Brent, the global benchmark. Today, Urals is selling for about $10 per barrel below Brent.
As the post-pandemic rebound in global fuel consumption wanes, the International Energy Agency predicts that global oil growth will slow in 2024 to about one million additional barrels per day, compared to 2.2 million barrels per day in 2023.
However, the expected increase in oil demand next year falls within the historical average of the pre-Covid-19 era.
Furthermore, some countries’ dire state of oil infrastructure could limit supply. It will be challenging for Venezuela, Iraq, Nigeria, or Libya to maintain production levels without new investments.