Delinkage Oil Price From Dollar Under Assessment


By Sven Ridley-Wordich
17 Nov 2007 at 06:20 PM GMT-05:00



RIYADH (ResourceInvestor.com) -- The linkage between high crude oil prices and devaluation of the dollar on the global markets has become one of the issues discussed in the sidelines of the OPEC Summit. During the behind-closed-doors discussions of the OPEC Ministers, Iran and Venezuela have proposed to delink crude oil from dollar denominations. Ministers have been discussing openly, as sources present during the meeting stated, whether oil should continue to be valued in dollars. Iran and Venezuela have already been openly urging members to consider the option. However, as OPEC officials stated after the meeting, even the mentioning of a possibility would currently have a debilitating effect on the position of the dollar. Still, Iran and Venezuela seem to be heading towards an implementation of the idea. Already, most Asian traders are being asked by Iran to have contracts set up in either Euros or Yen. Some negative effects currently hurting the dollar value worldwide could be contributed to the proposal.


Discussions presently seem to be heading towards a possible study of the de-linkage, even that OPEC will not include the option in its statement on Sunday. During other meetings, Saudi Minister of Foreign Affairs, Prince Saud Al Faisal, has warned parties not even to discuss the latter as it is very sensitive. The possible consequences of a move toward the euro or other international currencies could undermine the already very weak position the dollar has. Some financial analysts have repeatedly claimed that the dollar could keep its global position only to the fact that it’s the main currency oil is traded in. Taking this basis away, the dollar could plunge even more.


Most Arab Gulf countries fear the possibility of a further devaluation of the dollar, which will put increased pressure on their overall oil and gas revenues, on which the majority of their international trade is still based. Some OPEC countries have refuted claims that they could have negative impact on the dollar, as the majority of crude oil is manufactured by non-OPEC producers. Al Feisal has stated to the press, showing his concerns, that if such a decision will have to be taken, this only will be possible if non-OPEC countries are involved.


Iranian officials are not complying, however, to the OPEC views, as they have still asked members to consider the option to counter the weak position of dollar. Nigeria, Saudi Arabia and Qatar, all three vastly connected to the American sphere of influence via trade or political-strategic considerations, have refused to take the idea on board.


The idea will not become one of the main issues discussed by OPEC it seems, but developments such as the de-linkage need to be kept in mind for the coming years. In a rational way, the Iranian Venezuelan proposal could be effective and maybe even worthwhile taking. Economically it could support the hard-needed economic diversification projects of the OPEC members, leaving more value in the hands of governments. But as analysts also indicated, it would not only hurt global economy, which is still based on dollar transactions, push down American economic growth, but also have a very negative effect on the developing world. A crude oil sector based on euros will crush most developing countries’ already struggling economic development. Most African countries are energy importers, paying crude oil imports in dollars, while exporting products to Europe extensively. The revenues gained from the latter are needed to improve their own economies. If all will need to be paid in euros, the positive effects of the latter are removed, while higher crude oil prices will hurt directly all sectors in the end.


The obvious other link between the Venezuelan-Iranian proposal is to hurt American policies. A slowdown of the American economy and a weaker dollar is obviously seen by Tehran and Caracas as a nice way of confronting American president George W Bush. Oil is politics, the latter is currently also making headlines in Riyadh.



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