Will OPEC Dump the Dollar?

The fall of the U.S. dollar


Iran and Venezuela managed to persuade Saudi Arabia to agree to discuss the swooning buck at the next OPEC meeting in Abu Dhabi in December, but engineering a shift to an oil pricing regime based on the euro or another currency anytime soon is far-fetched. “The obstacles are overwhelming,” says Edward Morse, energy economist at Lehman Bros. (LEH) in New York. He notes that virtually all oil sold today is based on three benchmarks: West Texas Intermediate traded on the NYMEX; Brent traded on the ICE in London; and Middle East Dubai/Oman crudes as assessed by Platts or settled on the Dubai Mercantile Exchange. All are priced in dollars.
Eroding Power of Currencies

“It is hard to imagine how an exporter and importer of crude oil could agree on mutual terms without pricing off one of these,” Morse says. Besides, he adds, producers should know “it is an illusion to think that you are going to have higher real prices globally by switching currencies.” Prices, he says, already “basically reflect fair market value.”

At the same time, the falling dollar could bring about potentially destabilizing changes to the currencies of the Gulf Cooperation Council countries, which include Saudi Arabia, Kuwait, the United Arab Emirates, Qatar, and Oman. Most are now tied to the dollar. But the populations of the big Gulf producers are grumbling about the eroding purchasing power of their currencies, which have taken a roughly 9% hit against the euro since mid-August, despite rising oil prices and revenues.

Now, even hitherto reluctant governments such as Saudi Arabia’s are feeling pressure to take steps to make sure their citizens feel richer, not poorer. “Having the riyal brought down with the dollar reduces the buying power of the average guy,” says Brad Bourland, chief of research at Jadwa Investment, a Riyadh-based financial house. “Vacations in Europe and the U.K. seem very expensive.”

Business Week