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Arabs: No alternative to dollar in oil pricing

Sunday, 09 August 2009 23:33

The US dollar will remain the main global reserve currency and the official price of oil exports despite its sharp fluctuations and immense losses inflicted on Arab exporters, according to an official regional oil group.

Growing calls for abandoning the dollar as the world's main currency and the official price of oil sales following its recent weakening lack logic and reflect failure to understand the dollar's real role and the US economic muscle, said Organisation of Arab Petroleum Exporting Countries (Oapec).

"We hear from time to time calls for abandoning the US dollar as the world's main currency reserve and a unit of price for oil sales under the excuse of a decline in the greenback or in response to the US policies. These calls are neither pragmatic nor based on understanding of the real role of the US currency," the 10-nation Oapec said in a 25-page study entitled Oil media.

"The picture becomes clearer when we are able to distinguish between the dollar as a pricing unit and a reserve currency. Given the gigantic size of the US economy and the depth of the US market, we do not believe there will be an alternative to the dollar for the time being as the world's main currency and a reserve currency that is endorsed by many countries with financial reserves."

The Kuwait-based Oapec, which controls more than 60 per cent of the world's extractable oil deposits, said oil traders could set another currency for their spot crude transactions if they wish, but added this could create havoc given the persistent change in currency rates worldwide. It recalled that Iraq decided to switch to the euro in its oil sales in 2000 and this allowed it to make higher profits following a weakening in the dollar.

But the report noted that Iraq's decision was politically motivated, adding that such profits could not be guaranteed again on the grounds "there are permanent cycles that control exchange rates and could boost the dollar from time to time".

"Those who follow global economic developments can realise that the part played, and is still played, by the dollar as a reserve currency is based on its crucial role in ensuring global liquidity. Without the dollar and this liquidity, the world trade would not have jumped by more than 120 times since 1950. This was a natural result of the swelling liquidity spawned from the large deficit in the US trade balance," said Oapec, which groups the UAE, Saudi Arabia, Kuwait, Qatar, Bahrain, Iraq, Algeria, Libya, Egypt and Syria.

"The problem with the oil media and other experts and officials is that they always focus on the US trade deficit and highlight it as a big problem. But it should be noted that the US does not suffer from a deficit in its current account. The trade deficit is mainly because the US provides a much bigger market for products by other countries than they provide for its products. But this deficit is offset by a massive capital account surplus as the capital received by the US is far more than that it exports. A large part of the dollars in possession of other countries return to the US in the form of bank deposits, investment in government securities, or bonds issued by the US private sector. This is in addition to their direct investment in US real estate and shareholdings in American factories and other companies."

The study said it saw no problem if the dollar remains the main international currency or the price of oil as long as the US economy is open for all and the US economic output remains high that in turn "boosts assets invested in it".

"No other economy can cope with the US economy in terms of depth, liquidity and wide market. The oil media, mainly in the Arab region, should recognise this fact and look at such an issue from the right perspective."

The study followed calls in the Gulf and other countries to end the dollar peg, and dump the greenback as the world's main reserve currency. There have also been calls on Opec to adopt a basket of currencies instead of the dollar in pricing its crude sales on the grounds the greenback's decline has cost it massive losses.

Oapec's figures showed a fall in the dollar against other major currencies allied with high inflation to cost Arabs nearly $124bn in 2008 although oil prices hit historic record levels and regional nations pumped at near capacity. The surge in crude prices and output boosted the nominal Arab oil income to a record high of $618bn but real earnings were only about $494bn.

Global Arab Network

This article is an extract from report (Arabs see no alternative to dollar in oil pricing despite fluctuations) by Nadim Kawach, Emirates Business 24|7.

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