The Euro's Energy Bill

The oil-curve piece ended on which side of the energy ledger a currency sits: Canada sells more energy than it buys, the euro area and Japan buy more than they sell, and terms of trade carry the price of crude into each in opposite directions. This piece is about the buying side. The long-form account of what the 2021 to 2022 shock cost the euro area, with the ECB's own figures for the income loss and the current-account swing, is the EUR/USD energy article, and none of it is repeated here. What follows is the part that article leaves open: the shape of the bill, who pays it, and why the exchange rate does not simply track the price of a barrel.

A Bill Priced in Someone Else's Currency

Start with how much is bought abroad. Eurostat's figure for 2024 is that net imports met 57% of the European Union's energy needs, and that oil and petroleum products made up two-thirds of what was imported, with natural gas most of the rest. For 2023 the dependency rate stood at 58.4%, and the fuel-level figures are the ones that matter for a currency: 94.9% of the oil and petroleum products the Union consumed that year were imported, and 90.0% of the gas. Those are Union figures; the euro area is the greater part of the Union, and they are the nearest published measure.

Then there is what the bill is written in. The ECB's report on the international role of the euro carried a box in 2019 on exactly this, and the finding was blunt: around 85% of the oil the Union imported from outside its borders was invoiced in US dollars, while petroleum imports actually coming from the United States were just 4% of the total over 2010 to 2016. The dollar's place in the bill has almost nothing to do with where the oil comes from. The same box puts Japan, the other importer the oil-curve piece named, at about 90% dollar invoicing across petroleum, coal and natural gas imports in 2015.

So the bill carries two prices, not one: the price of crude, and the price of the dollar in euros. A euro that weakens against the dollar raises the bill in the currency it is paid from even when crude has not moved. That is arithmetic the exchange rate cannot escape, and it is one reason the same crude rally reads differently in Frankfurt than in Houston.

What Terms of Trade Means When You Are the Buyer

Terms of trade is the ratio of the prices a country receives for its exports to the prices it pays for its imports. When the ratio falls, the same volume of exports buys fewer imports, and the difference is income that leaves the country. For an energy importer the arithmetic is unforgiving, because energy sits on the import side of the ratio as a large and volatile line. Backus and Crucini, looking back across the quarter-century to the late 1990s, found that oil accounted for much of the variation in the terms of trade over that period, and that its quantitative role varied significantly over time. The second half of that finding matters as much as the first: oil is not always the story, but when it is, it is most of it.

The ECB measured the most recent instance. A box in its Economic Bulletin in early 2023 put the cumulative loss from the deterioration in the euro area's energy terms of trade at 2.4 percentage points of GDP between the third quarter of 2021 and the third quarter of 2022, and called it the largest five-quarter loss on record since the launch of the euro. That is a different measurement from the figures in the EUR/USD article, which come from an earlier box and a later article; the three are best read together rather than netted against each other.

Who Foots the Bill

An aggregate loss of income is borne by someone in particular, and the same box, titled with that question, answered it. Households in the bottom fifth of the income distribution spend 12% of their disposable income on electricity, gas and heating; those in the top fifth spend 4%. The poorest fifth therefore experienced purchasing-power losses twice the size of the richest fifth's. On the business side the shock fell substantially on profits and, to a lesser extent, on labour income, and governments absorbed a substantial part of the loss in disposable income. The bill was not paid at the border. It was paid unevenly, inside the economy, over the following year.

A second box, in the next issue, looked at the same shock from the exporters' side. Wholesale gas prices in the euro area in 2022 were on average thirteen times their 2020 level, a multiple far above what producers in the United States or Asia faced, and the authors read the deterioration in euro area price competitiveness as evidence of a more pervasive role of the energy price shock for the euro area than for its competitors. They also record the consolation: the euro's significant depreciation at the start of the crisis bolstered euro area price competitiveness even as it raised the bill. The currency move that made imported energy dearer in euros made euro exports cheaper in dollars, and the two effects landed on different people.

Not Every Barrel Costs the Same

All of that treats a rise in crude as one kind of event. It is not. Kilian's 2009 paper separated three kinds of shock that raise the real price of oil: a disruption to supply, a rise in global demand for all industrial commodities, and a demand shock specific to the oil market itself. Each, he found, has different effects on the oil price and on the macroeconomy, and changes in the mix of shocks help explain why regressions of economic aggregates on the oil price tend to be unstable. His example was the surge of the 2000s, driven primarily by global demand, which had failed to cause a major recession in the United States.

For a buyer the implication is direct. A crude rally that arrives because the world economy is running hot arrives alongside strong demand for the buyer's own exports, and the terms-of-trade loss is partly offset. A rally caused by a supply disruption brings the loss and nothing else. The same headline price can carry two different bills.

Kilian, with Rebucci and Spatafora, then took the same three shocks to the external accounts of the United States, the euro area, Japan and groups of other importers and exporters. What an oil shock does to the trade balance and the current account, they found, depends critically on how the non-oil trade balance responds, and that response differs systematically between the United States and other oil-importing countries. Their reading of the data on net foreign assets was that deeper financial integration tends to cushion the effect of oil shocks for major exporters and for the United States, but may amplify it for other importers. The euro area is one of those other importers. Its energy bill is the oil line plus whatever the rest of the trade account does in response, and the rest does not behave the way America's does.

Why the Currency Does Not Simply Follow

The intuitive model, in which an oil rally strengthens exporters' currencies against importers', is the one the theoretical literature predicts. Buetzer, Habib and Stracca tested it on 44 advanced and emerging economies using the same three-shock decomposition, and reported that, contrary to those predictions, they found no evidence that the exchange rates of oil exporters systematically appreciate against those of oil importers after shocks that raise the real oil price. What they did find is that exporters experience significant appreciation pressure after an oil demand shock, and tend to counter it by accumulating foreign-exchange reserves. The pressure is real; it shows up in reserve balances rather than in the exchange rate.

Fratzscher, Schneider and Van Robays looked at the other half of the euro's problem, the dollar. Taking a financial-market view of oil, they found a bidirectional causality between the US dollar and oil prices since the early 2000s, with both significantly affected by equity returns and by risk, and they note that oil did not react to those financial variables before 2001. Their explanation is the increased use of oil as a financial asset, and their model accounts for the strong and rising negative correlation between oil and the dollar over the period. For the euro this cuts both ways. The dollar is the currency the bill is written in, and the dollar and the oil price move on each other and on risk appetite, so the euro's move in an energy shock is partly a terms-of-trade story and partly the mirror of a dollar story that has nothing to do with Europe.

The oil-curve piece carried the finding that exchange rates lead commodity prices far more reliably than the reverse; these two papers are the importer's side of the same caution. Neither says energy does not matter for the euro. Both say the path from a barrel to an exchange rate runs through reserves, risk and the dollar, and is not a straight line.

What the Monitor Shows, and What It Does Not

The FX Monitor carries the import side in one place. The EUR/USD row is the only one that wears an energy tag, reading Dormant, Active or Dominant, set by how far crude has moved over the last week and month. When the tag is showing, the row's expanded view adds a line with the crude price and both of those changes, so a reader can see what the word was set from. USD/CAD's named driver is energy too, from the export side, and its expanded view says so in the page's words, Driven by oil & energy; the tag itself is EUR/USD's alone. And when the page's headline call is bound to the energy channel, it prints the condition under which that call no longer holds: This no longer holds if oil / energy prices break.

What the page does not show is most of what this piece has described: no gas price, no invoicing-currency effect, no terms-of-trade series, no reading of which kind of shock is under way. The energy channel is a crude-price read, published as a label so that it can be checked, not as a forecast of anything. No figure from the page appears here, for the reason the other pieces gave: it changes, and the page is the only honest place for it.

The bill, then, has a shape. It is large because the Union buys most of its energy abroad; it is dollar-shaped because that is what oil is invoiced in; it is borne unevenly, by poorer households and by profits, over the year after the price moves; and it is not the same bill every time, because a barrel dearer for want of supply and a barrel dearer for strength of demand cost an importer different amounts. What it does to the euro is the last step and the least mechanical one. The sources below are where each of those statements comes from; the EUR/USD article is where the 2022 episode is told in full.