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American oil swings and emerging markets

By Sonny Atumah

We are back to oil volatility with its conflicting signals on global markets. Countries policies greatly affect the demand and supply market. The President Donald Trump’s America first energy policy may have started having a global effect on economies.

File:  Oil and gas production

The United States oil production is getting to an all-time high and projected to reach the highest in the world next year. Even though it would not meet its domestic demand of 19.88, it may surpass Russia and Saudi Arabia if their current production levels remain the same. As we exit the 2018 northern hemisphere summer, the United States Energy Information Administration(EIA), figure is that the United States production has hit 10.9 barrels per day, bpd. The EIA’s projection is that by 2019 the United States would be producing 11.7 bpd.

Trump’s energy dominance concept is following a flight path to increase oil production and exports. His Energy Policy is to make the United States not just energy independent, but also expand its sphere of influence on international oil and gas markets. The United States no longer needs to conserve oil as domestic production increases have reduced the need for imports.

As a result, the United States has been given “more flexibility than in the past to use our oil resources with less concern,” the Associated Press was reported to have cited a memo from the Department of Energy. The situation is becoming that of America and the rest of the world in economic war. Analysts believe there appears to be a global economic and financial contagion that stems from America’s policy of seemingly unrelated political events to remain the number one global economy.

Achieving its aims means that some strong and strange economic policies should be taken.   America has strengthened its currency the dollar which is used to price oil. A strong dollar raises oil-importing countries’ import bills and makes dollar-priced oil more expensive to buy for holders of other currencies.  With Light, sweet crude for September delivery ended higher at US$66.43 a barrel on the New York Mercantile Exchange and Brent crude, the global benchmark, rising to US$72.21 a barrel, there are concerns that oil above US$80 is the start of demand destruction, which OPEC and its Russia-led allies want to avoid.

Nick Cunningham writing for Oilprice.com believes that it is hard to imagine that such a scenario doesn’t directly translate into a significant downward revision in global oil demand. After all, oil is priced in dollars, so a stronger dollar (and weaker currencies elsewhere) means that oil is vastly more expensive. That is especially true if oil prices are not falling (it used to be the case that the dollar and oil traded inversely, but that relationship has weakened recently). Economies are beginning to groan as American policies including interest rates are tinkered more frequently.

In June 2018, the Federal Reserve raised interest rates with two additional increases on the way this year. The interest rates increases help to strengthen the dollar at the expense of other currencies. The Federal reserve Chairman, Jerome H. Powell was clear that the American economy had strengthened significantly since the 2008 financial crisis and was approaching a “normal” level. Experts say the United States Federal Reserve may not change its plan for tighter monetary policy to support the U.S. dollar, whilst growing emerging market risk further support to the currency. It therefore means the pressure on currencies around the world will continue.

Emerging markets currencies have weakened against the U.S. dollar in recent weeks. The tariffs are overwhelming to the Turkish economy, but the levies come as emerging market currencies have already been under pressure this year. As the Federal Reserve interest rates increases, the dollar is strengthened at the expense of other currencies with global growth showing serious signs of strain. As weakened emerging markets currencies against the U.S. dollar in recent week with the Turkish crisis could affect oil demand.

Turkey appears to be an unusual casualty. It is an uncommon casualty because it is an insignificant producer or consumer of oil. President Trump last week doubled the steel and aluminum tariffs on Turkey. The policy signalled Turkish currency, the lira’s meltdown at 30 percent over the past week and 50 percent since the end of July. Experts believe that the crisis in Turkey is the result of errors on the part of the political leadership. The frosty relationship between the United States and Turkey may not accommodate the demand by America that it buys less oil from Iran.

Can Turkey’s problems with America ignite currency trouble elsewhere? Weaker currencies magnify the pain from higher oil prices. Forecasters think that in local currencies, oil prices are now at or above the record price levels seen back in 2008 in Turkey, South Africa, India and Indonesia. If Turkey’s crisis is the potential to set off a currency wildfire in emerging markets, it would make petroleum products prohibitively expensive, leading to a significant slowdown in global demand.

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