Mideast Gulf: Producers consider dollar change
During a behind-closed-doors Opec meeting in Riyadh in November, Venezuelan and Iranian representatives argued that the cartel should stop pricing oil in "worthless" dollars, switching instead to euros. Saudi foreign minister Prince Saud al-Faisal candidly told ministers that the mere fact that Opec was talking about the US currency would unsettle the markets. And, indeed, when the private session was accidentally broadcast, the dollar weakened further, aggravating the loss of purchasing power that oil exporters are experiencing.
Opec ministers will resist combined pressure from Venezuela and Iran for the cartel to break from the dollar as the pricing mechanism for its oil. But they have agreed to continue talking about which currency to use. This has raised expectations that the Gulf Cooperation Council (GCC) states – which include Saudi Arabia, the UAE and Qatar – might also change their currency policies. These three countries are among those that peg their currencies to the dollar.
Before the GCC heads-of-state meeting on 4 December in Qatar, speculation mounted that the organisation was on the verge of ending the dollar peg. A report by Standard Chartered Bank argued that although there was a case for retaining the dollar peg while Gulf economies remain so reliant on energy exports, there should be a sharp devaluation, in the order of 20%, against the dollar as an interim step before an eventual shift to a basket of currencies.
While the US is cutting interest rates to cope with a slowing economy, the booming Gulf is grappling with an inflationary bubble that requires much tighter monetary policy. Most of the big oil-producing states remain hesitant about removing the peg with the dollar, despite the precedent set in May by Kuwait, which switched to a basket of currencies. Saudi Arabia, however, is expected to hold out against moving from the dollar peg or devaluation: the country's dollar reserves are so large, at around $270bn, that its central Bank, Saudi Arabia Monetary Agency, would find it difficult to reallocate them.
Yet most GCC ministers privately acknowledge that a break with the dollar peg is on the agenda and could be inevitable if the dollar fails to strengthen. The issue may be revisited if the global economy revalues and the dollar changes its position as the most globally traded currency. That may have to wait for bigger global economies, such as China, to make the first move.