The Middle East tensions and the continued tensions between Russia and the West – due to the Ukraine war – haven’t jacked up the oil prices. Why? Because the post-Covid economic slowdown continues, which some believe could lead to recession.

In fact, there is a constant decline.

Persistent inflation and higher interest rates have reduced oil demand as an economy like China too is experiencing slower economic growth.

As the business week ended on Friday, Brent had closed at $71.61 per barrel and the US crude West Texas Intermediate (WTI) at $68.65.

The weekly loss for Brent stood at 0.49% while the correspondent monthly figures [last 30 days] show the prices dropping by 12.22%. Meanwhile, the Brent price is down 13.14% for the three-month period.

It is certainly a trend, further explained by a 5.12% decline since January 1 and a massive 17.04 drop over the past year.

Although, WTI gained 0.13% over the week, it has experienced a 12.56% monthly decline while being down 12.08% in three months. The drop in the WTI prices is 3.39% since Jan 1 and 16.18% over the past year.

COST OF DOING BUSINESS

A combination of Covid-19 pandemic and the Ukraine war triggered a global economic crisis by disrupting supply chains and raising prices of both raw materials and finished goods.

The rising prices not only hampered economic activity, but also started reducing consumers’ purchasing power – a vicious circle that affected the poor and developing nations most. However, even the developed economies couldn’t escape the effects.

It is the traditional approach of interest rate hikes that was employed by the central banks around the world to arrest the trend. Japan remained the only exception. Turkiye started following the same path after President Erdogan earlier challenged the traditional wisdom unsuccessfully.

It meant that the cost of doing business was propelled to new highs. Businesses were hit badly as not only the energy tariffs and raw material prices had skyrocketed, but also the higher borrowing costs made expanding the existing setups or establishing new ones almost impossible.

CURRENCY DEVALUATION

Coming back to the oil, the drop in prices should have started benefitting the poor and developing countries. For example, we, in Pakistan, would have been getting cheaper petrol and diesel. But unfortunately, it isn’t the case thanks to the strong and dominant US dollar.

Weaker currencies are both a product of the economic crisis all the countries have been witnessing across the globe.

However, some would rightly argue that the weaker currencies are both the reason and the product. They also argue that the one-size-fit-all – interest rate hikes – wasn’t and isn’t a solution for every country because of the domestic issues, ranging from the level of industrialization to the overall socioeconomic development.

In short, they think that the currency devaluation had already triggered economic crisis in Pakistan and the pandemic plus Ukraine war only exacerbated the situation.

So, a weakened rupee means the imported fossil fuels are expensive and their prices at gas stations [petrol pumps] only reflect that.

Pakistan is just an example. Other countries with weaker currencies are also dealing with the same challenge.

Meanwhile, even Japan – one of the world’s top economies – felt the devastating effects of currency devaluation. Tokyo couldn’t afford a sliding yen which reached a record low exchange rate of 162 against the US dollar. It happened on July 11 this year.

However, the Japanese yen managed to stop the slide thanks to a vigilant Bank of Japan. The US dollar was available for 140.82 on Friday.

Meanwhile, any Federal Reserve rate cuts would make the world’s top currency less attractive to those who remain in search of a safe haven to protect their investments.

NO ONE WANTS OIL GOING TOO HIGH

Economic slowdown and the threat of recession mean everyone is looking to reduce expenditures and cost of doing business. That’s why even the oil producing nations – OPEC, OPEC+ and others – cannot afford skyrocketing prices.

The reason is simple. It will worsen the prevailing economic crisis, thus the rush for energy security visible everywhere.

Hence, the Gulf States like Saudi Arabia, which is striving hard to implement Vision 2030 set by pragmatic Crown Prince Mohammad bin Salman, needs more money for executing the ambitious plans. But Riyadh too understands that higher oil prices will further reduce demand and worsen the global economic crisis.

It is believed that they would be happy if oil stays over $80 or thereabout in the longer run.

To tackle the effects generated by reduced oil revenue, Saudi Arabia is aiming at even more rapid economic diversification. But how to balance the income vs expenditures equation remains a challenge.

Meanwhile, the share of non-oil economy in Saudi Arabia and the United Arab Emirates is now more than 50% and 70% respectively, a clear sign that economic diversification is producing the desired results.

SLIDE PREDICTED

On the other hand, Morgan Stanley in August cut the oil price forecast to $80 from $85 per barrel for the last quarter of the year. It has again revised the estimates to $75.

Meanwhile, Citi is seeing oil prices dipping to $60 per barrel next year if OPEC+ fails to implement more production cuts.

One would also have to see whether the expected US rate cuts would bolster the market sentiments globally, thus generating more oil demand.

As far as the “owners” of the weaker currencies are concerned, they would love to see a massive decline in oil prices so that fuel prices become affordable to consumers in their countries. One can’t see stronger currencies amid the prevailing crisis and the IMF calling for sticking to the formula of market determining the exchange rates.