Oil, The Petrodollar, And The Next Emerging Market Crisis

The comments below are an edited and abridged synopsis of an article by John Rubino

Oil prices are up over the past year, which is bad if you’re a developing country that imports a lot of oil. But the US dollar (the petrodollar) is also up, which compounds the problem because oil is priced in dollars. Brazil, for instance, finds itself buying an appreciating necessity that’s priced in an appreciating currency. The result is serious trouble for at least some countries in that position.

Rising oil prices lead to disruptions that force the local government to increase fuel subsidies, which weakens the local currency versus the dollar, which raises oil prices further, which causes disruptions, and so on, until the country turns into Argentina.

So if you’re tracking the “crises move from the periphery to the core” thesis, one good guide is the flow of oil. If a country is a big net importer of oil and both the price of oil and the petrodollar exchange rate are rising, it might be the next domino to fall.