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Debate at the OPEC Summit
By Rohini Hensman The OPEC Summit in Riyadh over the weekend of 17-18 November was the scene of a political debate that is not normally associated with the oil-producing cartel. The meeting was dominated by a discussion of the falling value of the US dollar, the currency in which the oil exports of most OPEC countries is denominated. ‘The dollar is in free fall, everyone should be worried about it,’ according to Venezuelan President Hugo Chavez; ‘The fall of the dollar is not the fall of the dollar, it’s the fall of the American empire.’ ‘They get our oil and give us a worthless piece of paper,’ added Iranian President Mahmoud Ahmedinejad. ‘The dollar has no economic value.’ However Saudi officials rejected the suggestion that the meeting discuss ending the practice of pricing crude in dollars, and emphasised the purely economic agenda of OPEC. It is undeniable that Chavez and Ahmedinejad have a political axe to grind, and that is not hard to understand: both have been the target of US attempts at ‘regime change’; Iran is in addition facing threats of military attack by the US. But is the Saudi claim that its agenda is purely economic plausible? The currencies of the six Gulf Cooperation Council (GCC) countries – Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates – were pegged to the dollar in January 2003, but this peg has increasingly come under pressure as the dollar has declined. The corresponding devaluation of their own currencies has led to rapid inflation in GCC countries, while at the same time devaluing their foreign exchange reserves. Dropping the dollar peg and diversifying foreign exchange reserves would seem to be a sensible course of action from a purely economic point of view, and Kuwait did indeed drop the dinar’s fixed exchange rate with the dollar in May, while the UAE is already diversifying its reserves and aims to move 10 per cent of them into euro. In this context, the Saudi leadership’s insistence that there should be no change in policy could be as political as the Iranian and Venezuelan position, driven by Saudi Arabia’s political alliance with the US rather than the economic welfare of the country. However, there may be other reasons for their reluctance to talk about abandoning the dollar peg. One reason could be the fear that such talk would devalue the dollar, and thus the country’s dollar reserves, even further. Another complication arises because the GCC countries had been planning to issue a common currency in 2010, and preparation for this would require harmonising their economic policies, particularly fiscal and monetary policies. The common dollar peg was originally seen to be part of th process of harmonisation. But the fact that Kuwait was forced to drop the peg has created the possibility of increasing disharmony in economic policies. Thus the refusal to discuss any changes of policy at OPEC until the GCC countries have had their own discussion could be an attempt to arrive at a common policy before making any further changes. If this is the reason for the Saudi reticence about policy changes, it will become clear at the forthcoming GCC meeting in early December. Studies have suggested that pegging the prospective Gulf currency to a basket of currencies would contribute to both competitiveness and stability, and it would therefore make sense to peg the currencies of the GCC countries to the same basket of currencies prior to monetary union. A common Gulf currency would provide a boost to regional trade, and help the member countries to diversify their economic base away from hydrocarbons. Oil sales are likely to be denominated in the new currency, which would then become a major world reserve currency, and could also become the preferred reserve currency for the central banks of Arab countries. All this would signal a much more far-reaching change in the world economy than simply moving from the dollar to the euro as the preferred world reserve currency. For the Gulf countries, it could result in a much more balanced development than the enrichment of a small elite that has characterised these countries so far, and thus ensure that they do not sink into poverty when their oil runs out. For the rest of the world, it means that a more or less precise date can be set for the demise of the US dollar as world currency, which depends on oil sales being denominated in dollars: somewhere around 2010. There is anxiety in some quarters that if the dollar sinks to the value warranted by the fundamentals of a not-too-healthy US economy, this could lead to a global recession. This is indeed possible. If countries whose foreign exchange reserves are mainly in dollars and who depend heavily on the US for their\ export market (China, for example) take no measures to protect themselves in the meantime, they could find their reserves and markets slashed simultaneously. However, if they take steps to diversify their reserves away from dollars and their export markets away from the US, there is no reason why the world economy should suffer. On the contrary, it would become more stable if it depends on multiple currencies rather than just one. At least that would slow down the rise in the price of oil, and reduce the danger that an economic crisis in one country might result in a global recession!
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