This is good news for President Joe Biden and other Western leaders, for whom rises in the price of gasoline are far more politically salient than any other form of inflation. Drivers tend to buy gasoline frequently. Even when they don’t stop, they’re accustomed to see the price advertised in big numbers whenever they pass the service station. But even with a Monday morning bounce for oil in Asia, the issues for the OPEC+ oil producers, meeting Thursday, grow all the more complicated. Several countries have eased pressure on supply by releasing strategic reserves, while OPEC is boosting production. With a new variant to dampen demand for a while, there’s pressure for the oil exporters to agree on reducing production again. They have found this difficult at several points in the recent past.
Sharp falls in the oil price generally portend trouble for emerging markets, even if they help to relieve inflationary pressure on the developed world. And indeed, emerging market currencies tumbled on Omicron Day to drop below their trough from the shutdown last spring:
If Omicron does mean further waves of the pandemic, it’s likely to cause the most damage in emerging markets, which generally have lower vaccination rates. That’s a problem, because the emerging world is bracing for a dose of austerity to pay for last year’s emergency measures, as this chart from the Institute of International Finance demonstrates:
There are further problems. The emerging world has already had to contend with higher yields and weakening currencies on a scale that hasn’t affected the developed countries, where it’s possible to print money and still enjoy low rates. This chart was produced by Robin Brooks of the IIF last week, before the omicron news, to make the point to modern monetary theorists that only countries with a long record of fiscal conservatism could print money at will without consequences. It also shows that EM could now face a severe problem:
Turkey obviously suffers from very specific issues of its own. But the sell-off of emerging currencies at the end of last week was broad-brushed. A stronger dollar, a lower oil price and a new omicron wave of the pandemic could make a lethal combination just at the point when emerging countries are least able to withstand it. While we await news from the scientists about just how vaccine-resistant and deadly this variant is, the risks to monitor concern oil and emerging markets.
Survival Tips
I’m hoping for a crowd-sourced survival tip. I’m planning a trip back to the U.K., and had the bold idea of landing and then heading straight for the birthday party of a good friend. Omicron has put a spanner in that idea. Under the U.K.’s new rules, anyone arriving must take a PCR test, and then “self-isolate” until the result arrives—which is generally about 24 to 36 hours. During that time, there is a fearsome list of rules to obey:
