Last autumn, headlines began to declare national “winners and losers” from the precipitous drop in oil prices over the second half of the year. They contended that the United States and its friends would benefit from the fall in oil prices; and that its most strident adversaries would not. While largely true, the headlines did not capture the whole story.
Since international prices for oil are quoted in U.S. dollars, the exchange rate between the U.S. dollar and another country’s currency (a currency pair) also matters when calculating the real impact of a change in oil prices on that country. Take Russia for example. Much has been made of the fact that half of Russia’s government budget is based on revenues from oil. One might suppose, because oil prices have fallen about 50 percent over the last six months, that Russia’s government budget would be pinched by about 25 percent (reflecting the 50 percent fall in oil revenues on half its budget). Such a contraction would be catastrophic for the Russian government and Russia’s economy, given its high dependence on government spending. That might lead Western policymakers to believe they can easily wait out Russian President Vladimir Putin’s aggressive designs.
But one must remember that the Russian government does not pay for domestic goods and services in U.S. dollars, but rather in Russian rubles. Any drop in the value of the Russian ruble against the U.S. dollar allows Russia to reap more rubles for its dollar-based oil revenues. (Even so, a sudden devaluation in a country’s currency can still wreak havoc on that country’s wider economy, because it fails to let people adjust to the benefits of devaluation, before they feel its negative impacts.) Given the devaluation in the Russian ruble (which has fallen in tandem with oil prices), the real impact of the fall in oil prices is closer to only 8 percent, rather than 25 percent. While that is still a big challenge for the Russian government’s budget, it is a lower hurdle for Putin to surmount.
Similarly, one might expect that Japan, a key American ally in Asia, to unreservedly benefit from the decline in oil prices. As a country completely dependent on oil imports, any decline in oil prices should boost its economy. Given that oil prices have fallen about 50 percent over the last six months and that Japan imported about 1.6 billion barrels of oil in 2014, one may naturally assume that Japan is now saving a vast sum that would act as a fiscal stimulus to its economy, making it a stronger country and one better prepared to cope with a rising China.
That has happened, but not to the degree that the halving of oil prices would suggest. That is because the value of the Japanese yen against the U.S. dollar has fallen too. During the second half of 2014, the yen devalued about 15 percent, as a result of the Japanese central bank’s quantitative easing policy. That shaved one-fifth off the benefit from the decrease in oil prices to 40 percent in yen terms. Ironically, the lower energy input prices had made it more difficult for the Japanese government to achieve its 2 percent inflation target, which Tokyo believes will help lift the country out of its decades-long deflationary economic stagnation.
As the cases of Russia and Japan have shown, changes in currency exchange rates can make a real difference on the impact that changes in oil prices have on a national economy, whether they are net oil importers (those shaded in blue in the chart below) or net oil exporters (those shaded in red).
As a region, Asia has benefited from the drop in oil prices. Almost every country in the region is a net oil importer. Chief among them is China, whose slightly appreciating yuan against the U.S. dollar, has allowed it to fully benefit from the lower oil prices. In fact, Beijing has taken advantage of them to less expensively fill its strategic petroleum reserve. But not far behind have been India and Indonesia. The currencies of neither country have devalued by more than 6 percent, allowing them to realize almost all of the benefit from the decline in oil prices. That, in turn, has allowed their central banks to cut their interest rates to spur their economies without having to worry as much about inflation. Lower oil prices have also enabled Indian Prime Minister Narendra Modi and Indonesian President Joko “Jokowi” Widodo to slash fuel subsidies, which had been draining government coffers in the past, without a public outcry. That has freed up resources that they can devote to infrastructure and defense, as both national leaders have promised.
However, the fall in oil prices has also pinched some American allies. One such country is Australia. Though it is a net importer of oil, Australia has ambitions to become among the world’s leading exporters of liquefied natural gas (LNG). But LNG prices, which are often linked to those of oil, have followed oil’s prices downward. That has put into jeopardy Australia’s new round of offshore LNG development. According to the Australian government, it will likely miss out on about AUS$750 million in petroleum resource rent tax over the next four years—about the cost for one of the new diesel-electric submarines that its navy wants. The situation would have been even worse had the Australian dollar not devalued by 13 percent against the U.S. dollar.
Finally, some countries, like Venezuela, whose currencies are effectively pegged to the U.S. dollar, have felt the full impact of the decline in oil prices. Unfortunately for Venezuela, it imports most of its consumer and industrial goods—including food, clothing, machinery, vehicles, etc.—and it holds debts mainly denominated in U.S. dollars. Thus, any devaluation of the Venezuelan bolívar to temper the impact of lower oil prices would also cause the costs of goods to soar and make its U.S.-dollar debts crushing. To avoid a financial crisis, Venezuelan President Nicolas Maduro has travelled to China this week. In the past China has agreed to oil-for-loan agreements, in which China provides immediate financing to Venezuela in exchange for future deliveries of Venezuelan oil. Already existing deals with China have begun to squeeze out Venezuela’s ability to use its oil to bring Latin American countries into its orbit. Rather, new deals are more likely to move Venezuela close to China’s orbit.
By the first week of January 2015, the benchmark prices for Brent and West Texas Intermediate crude oil had fallen to $51 and $48 per barrel, respectively. As long as these conditions persist, oil-exporting countries will suffer and oil-importing ones will benefit. But to really understand whether these countries are weakening or strengthening to the extent that the decline in oil prices suggest, one would be wise to also consider the trajectories of their national currencies.
 “Winners and Losers,” Economist, Oct. 25, 2014.
 Abheek Bhattacharya, “China’s Petroleum Reserve Builds Shaky Floor for Oil,” Wall Street Journal, Sep. 3, 2014.
 Australia is considering a Japanese submarine design for its next-generation submarine fleet. The most recently launched Japanese Sōryū-class submarine cost $540 million and AUS$750 million converts to $615 million at today’s exchange rate. John Hofilena, “Japan launches newest submarine Kokuryu amid party atmosphere,” Japan Daily Press, Nov. 04, 2013, Eric Yep, “Falling Oil Spells Boon for Most of Asia’s Economies,” Wall Street Journal, Jan. 4, 2015; Max Mason, “Oil price plunge sends petrol to four-year lows as Australia feels it at the pumps,” Sydney Morning Herald, Dec. 22, 2014; James Paton, “Plunging Oil Threatens to Spoil Australia’s Next Gas Boon,” Bloomberg News, Nov 27, 2014.
 Eyanir Chinea and Brian Ellsworth, “Venezuela’s Maduro to visit China, OPEC nations amid cash crunch,” Reuters, Jan. 5, 2015; Nicole Hong and Kejal Vyas, “Oil Shakes Venezuelan Debt to Its Foundations,” Wall Street Journal, Dec. 22, 2014; “Inside U.S. Oil,” Thomson Reuters, Aug. 22, 2014, pp. 7-8.