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Currency depreciation affects importers and exporters differently

Hydrocarbon Engineering,

According to the US Energy Information Administration (EIA), widely traded futures contracts for North Sea Brent crude oil in global financial markets are typically priced in US dollars. The appreciation of US$ against most other currencies since last summer can either mitigate or exacerbate the effects of the recent sharp decline in US$-dominated crude oil prices, depending on whether a particular country is a net importer or net exporter of crude oil.

For example, the price of Brent crude since 1 July 2014 decline by 56% through 21 January in US$. However, given the depreciation of the Indian rupee and Turkish lira against the US dollar over the same period, Brent crude prices in terms of those currencies fell by only 55% and 52%, respectively. Turkish and Indian consumers are therefore experiencing a lesser decline in the cost of imported oil products than consumers in countries that use US$ or currencies with lesser or no depreciation against the US$.

In contrast, producers in countries that are net oil exporters, like Canada and Norway, find that the percentage decline in the price they receive from oil sales is lower than the decline in US$ terms when they convert their oil sales revenue from US$ to Canadian dollars or Norwegian kroner. The price of Brent crude in thee currencies has fallen only 49% and 46%, respectively, since July. Because some producer expenses, like wages and taxes, are primarily denominated in the home currency of the country where production occurs, the depreciation of currencies of crude exporters against the US$ is partially mitigating the adverse effects on producers of the recent fall in crude prices.

Adapted from a press release by Emma McAleavey.

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