Oil prices have been softening since the summer of 2014, recovering slightly this year before falling more than 5 percent on Monday. The decline is bad news for countries that rely on crude petroleum exports.
A sudden drop in prices can dramatically affect the currencies of those countries—most notably Russia, which produces about 12 percent of the world’s crude oil supply. The country depends on sales of oil and natural gas for a more than 50 percent of its federal budget revenue, according to the Energy Information Administration. But the ruble is not the only currency that’s moved by changing oil prices.
At least six countries have seen their currencies drop over the last year along with the Brent crude oil benchmark. According to the most recent World Bank data, there are 60 countries that rely on oil proceeds for more than 1 percent of their gross domestic product, and 10 that receive at least a third of their GDP from oil.
Over the last two years, CME futures for the Norwegian krone and the Russian ruble have been highly correlated with monthly changes in Brent crude oil (with correlation coefficients of 0.74 and 0.83, respectively, according to information from market data firm Kensho). Some of the correlation may have to do with changes to the dollar, which is used to price oil and which historically has tended to move inversely with oil prices. A 2007 study by the European Central Bank found a positive relationship between the real oil price and real exchange rate for Russia, but not for Norway or Saudi Arabia.
The decline in oil prices will only come through to the currencies of some oil-dependent nations. That’s because the majority of oil-producing economies use hard or soft pegs to the dollar, euro or other benchmarks, according to data compiled by the International Monetary Fund.
About 63 percent of those top countries are pegged, and only 25 percent allow their currencies to float. Of the 25 countries that are most dependent on oil based on the World Bank’s oil rent metric—which calculates proceeds from oil sales divided by GDP and includes countries such as Kuwait, Saudi Arabia and Venezuela—none are free-floating.
The ruble hit a seven-month low on Monday, along with a number of other ex-Soviet bloc countries, including Belarus and Ukraine, and most of the oil exporters mentioned above. The collapse was inspired by turmoil in China, which is a crucial driver of global demand for commodities. (It’s also worth pointing out that all commodities-based economies are hurt by an economic slowdown in major commodity consumer China, and so it should be expected that their currencies may suffer as well.)
According to calculations by Reuters, the implied demand for oil in China was 10.12 million barrels per day in July, a 4 percent drop from June. Based on EIA figures for April, that demand accounts for about 13 percent of global production. Slowing global demand is expected to continue next year.
But slowing demand isn’t the only issue. OPEC has increased pumping to three-year highs, and U.S. producers have continued drilling even as prices plummet, feeding into the global oversupply. American shale oil producers are partially to blame for that supply-side problem, while OPEC output tends to be stable on a year-to-year basis, U.S. production has thrown a wrench into the works with its sudden, explosive growth.
OPEC leaders have criticized U.S. producers’ “all-out exploitation of tight oil,” and the Americans’ expectation that OPEC countries will be willing to sacrifice market share in order to keep prices at reasonable levels.
“The fact is, the advent of this new resource, which the United States and Canada, in particular, are exploiting to the full, has upset the oil market apple cart, as it were,” wrote OPEC in a bulletin earlier this year. “An unstable oil market with wildly fluctuating prices serves no one’s interest.”
Disclosure: NBCUniversal, parent of CNBC, is a minority investor in Kensho.