Business | Opinion
Dollar losing currency among Opec nations
Back in the day, long before pink-toned fifty dollar bills and larger presidential heads, the dollar was the currency everyone around the world could instantly recognise.
- By Leah Bower, Special to Gulf News
- Published: 23:51 October 29, 2007
Once upon a time, the greenback was king.
Back in the day, long before pink-toned fifty dollar bills and larger presidential heads, the dollar was the currency everyone around the world could instantly recognise.
But, with the rise of the euro, the appeal is to using a basket of currencies and, of course, the dollar's steady slide over the past few years, using the US currency to price oil is falling out of favour.
At least that is what what Venezuela's Energy Minister Rafael Ramirez told reporters last Friday.
"The need to establish a basket of currencies... will probably be a point of discussion in the next Opec summit," Reuters reported Ramirez as saying.
"The dollar as a benchmark currency has been weakening quite a lot and it creates distortions in oil markets."
Venezuela's Hugo Chavez, who has a long history of butting heads with George W. Bush, is almost certainly wearing a smirk over this latest development. But satisfying potshot at America aside, what are the ups and downs of such a move?
Well, as with almost everything, opinions vary widely.
For Bush, the biggest concern is that Opec switching to a basket of currencies instead of the dollar will be yet another shock for an economy already struggling to recover from the subprime lending debacle, and subsequent cooling of the property market. It certainly seems like such a move would, at the very least, contribute to the general impression that the US is struggling.
And currently the US enjoys being able to purchase oil in its own currency. If a switch is made, they'll have to sell dollars to buy other currencies in the basket, while other purchasers would need fewer dollars to buy oil.
Over the past few months, with crude prices climbing to more than $92 per barrel last week, analysts have been scrambling to pinpoint exactly what was going on. I've read about the impact of hurricanes forming in the Atlantic and Turkish troops moving in on Northern Iraq, but more and more people seem to be settling on the declining dollar as the underlying reason for oil heating up.
Long story short, oil producers are able to buy less than they once could with the dollars they are getting paid in. So, they need to get paid more dollars per barrel.
The state of the dollar is also drawing in speculative investors, which only adds fuel to the fire.
That isn't to say that unrest and weather don't contribute to the problem, but it is the dollar that seems to be on many minds right now.
So it should be no surprise that Ramirez says Opec is looking to move to the basket.
However, we have no idea what currencies Opec will even put in such a basket, although it seems like a safe bet that both the euro and the dollar will be included. Even more cloudy is how ministers from 11 countries around the world, ranging from Saudi Arabia - where the riyal is pegged to the dollar - to the always-argumentative Venezuela, will manage to agree on what goes into the basket.
Gulf Cooperation Council countries - the UAE, Kuwait, Qatar and Saudi Arabia - might not want to switch to a basket since their currencies are currently pegged to the dollar in anticipation of a monetary union in 2010.
The only thing I believe is truly unlikely is Opec making the switch to another single currency such as the euro. At some point, the euro will start to decline against the dollar and the organisation would simply be back in the same boat it is in now - getting paid in a currency that isn't carrying the same weight it once was.
- The writer is a freelance journalist based in Alaska, USA.
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