In Theory: Difficulties in striking the right balance

Many observers are puzzled about the ambiguous reason for the continuous fluctuation in the accounts of the oil-producing countries, including the Arab states, given that crude oil prices witnessed significant rises this year to exceed at times the ceiling fixed by Opec at $28 per barrel.

Given such developments, it is assumed that oil revenues should witness significant rises and most of the oil-producing nations should overcome, at least temporarily, the problem of such fluctuations that reflect adversely on the overall economic conditions in such countries.

In spite of the generally improved economic conditions in these countries this year, the question of balancing their financial conditions remains pending until further notice. In addition, some of the regional countries have already entered the endless tunnel of overseas loans.

How can one understand this equation? What is the relationship between the oil market developments with the overwhelming changes in foreign exchange rates, especially the major and rapid change in the exchange rate of the dollar that is used for fixing oil prices and its sharp decline against the euro, Europe's single currency?

During the last two years, the US currency dipped by around 40 per cent against the euro which is rising strongly on the back of the strong performance of European economies compared with the weary US economy that is burdened with additional costs arising from military interventions in more than one region in the world.

Simple calculation

Using a simple calculation, the average price of a barrel of crude oil this year amounting to $27 is not worth more than $17 per barrel in terms of purchasing power compared with the US currency's rate of exchange two years ago when the average price of crude was $22.

Therefore, the real value of oil revenues declined by a similar percentage in practice considering that the region's imports from Europe and Japan account for the biggest percentage of total imports of the oil-producing countries.

That is the reason for the repeated calls for reviewing the relationship between oil, the dollar and the euro now that the European single currency has gone beyond the initial launch phase to become as strong as the US currency in the world money markets.

We do not at all suggest abandoning the US currency since the currency markets like all other commodity markets are facing a state of instability and sharp fluctuations at times as is the case at present.

What is required is finding a mechanism for pricing oil and national currencies to ensure their stability so that the oil-exporting countries will be able to take advantage of price rises on the international markets. Last week several ministers of oil and finance in the Opec member states talked about this proposition.

Complex politics

Indeed, we do not deny the complex political aspects of such a trend. However, the current pricing system does not reflect the new balance of economic powers in the world, particularly the emergence of united Europe as the biggest consumer market bringing together more than 350 million people enjoying an enormous purchasing power, high income levels and good growth rates representing a strong boost to their single currency.

Considering that a currency is a reflection of economic performance in this country or economic bloc, the relationship between oil, the US dollar and the euro must be a reflection of the economic relationships between the oil-producing countries on the one hand and consumer nations on the other. Such a relationship represents the economic weight of every group in its relationship with other groups of countries.

In such a case only oil price rises can have a significant impact upon the real value of oil revenues in particular and on economic conditions in the producing countries in general, including ensuring significant possibilities of getting rid of the chronic deficit in annual budgets and rearranging financial conditions in general.

The current relationship between oil, the dollar and the euro only results in the slipping of prices in oil revenues through the major imbalance suffered by the major currencies' exchange rates. Obviously, this results in the loss of many opportunities for the oil-producing countries to benefit from most of the gains to be achieved from crude price rise.

The author is a UAE economic expert