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Oil Producers Looking to Abandon The US Dollar

FYI | Oct 29 2007

By Greg Peel

OPEC will discuss the prospect of switching to pricing its oil in US dollars to pricing in a basket of currencies, Reuters reports. The suggestion came from Venezuela’s energy minister, and Venezuela has been considered one of America’s enemies ever since the left wing Hugo Chavez came to power.

While oil prices may have soared, they have done so as much as a result of a weakening US dollar as from demand or geopolitical tension. Thus the benefit to oil producers of selling their wares in US dollars is diminished. While a move to a basket of currencies may make commercial sense, it is yet another nail in the US dollar’s coffin. Purchasers of OPEC oil outside the US would not need to buy as many US dollars if basket pricing were in place, while US purchasers would have to sell US dollars to buy the other currencies in the basket.

Meanwhile, OPEC has indicated it has no intention of increasing production quotas as the oil price rises through US$90/bbl. As far as OPEC is concerned, the world is comfortably well supplied with oil.

But it’s not just America’s enemies who are concerned about the US dollar. Inflation in Saudi Arabia and the Gulf states is running rampant, and now the US is looking at lowering its interest rate yet again. Most Gulf states have their currencies pegged to the US dollar, which in turn implies interest rates must move accordingly as well. But the Gulf states should be putting up their rates, not lowering them.

Reuters reports regional finance ministers and central bankers have met to review their intentions to create a monetary union and a single currency by 2010. The problem is some in the region are unsure how now to proceed given the impact a sliding US dollar is having on currency pegs. Each country has its own economic situation.

The (US steered) IMF has scolded the Gulf states, suggesting they need monetary policies to be consistent with their dollar pegs. After the Fed’s interest rate cut in September, the six states broke ranks on their interest rate responses. This has raised speculation some would now allow their currencies to revalue. Saudi Arabia, with 4.4% inflation, declined to follow the US, along with Oman (6.5%) and Bahrain.

Qatar (12.8%) and the UAE (9.3%) elected to go with the US cut, along with Kuwait, but great US ally Kuwait dropped its US currency peg in May in favour of a basket. Currencies across the Gulf region have strengthened to 20-year highs.

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