Oil greasing dollar’s skid: OPEC’s move adds to woes of currency, economy
While Washington pushes economic sanctions on Iran, Iran is pushing back with some economic penalties of its own that are helping to drive the price of oil toward a record $100 a barrel.
The radical Middle Eastern state, joined by Venezuela and Ecuador — the newest OPEC member, which is pushing the oil cartel further toward the radical camp — succeeded last weekend in persuading a majority of OPEC members to study its proposal to discard the link between oil and the dollar.
Any move by the Organization of Petroleum Exporting Countries, which produces 40 percent of the world’s oil, to price oil in currencies other than the dollar would be an unwelcome development for the U.S., analysts say.
Aside from tarnishing the most visible symbol of U.S. power in the world economy, it would hurt the U.S. economy at a vulnerable time, further weakening the dollar, pushing up fuel costs, adding to inflation and driving up interest rates. Economists liken higher oil prices to a “tax” on consumer spending and growth since it is like a dead weight on the economy.
“The dollar’s softness is a metaphor for the weakness in the overall economy,” said Greg Valliere, chief Washington strategist at Stanford Policy Research. The pronounced weakness of the dollar this fall was precipitated by the housing collapse and subprime mortgage crisis, which have been threatening economic growth.
“By next fall, people may conclude that the dollar’s fall is a loss of prestige,” Mr. Valliere said.
Around the world, political leaders are taking notice of the dollar’s travails and are starting to prefer other currencies that have been stronger lately, like the euro and the Australian and Canadian dollars.
While Iran and Venezuela for several years have pushed to switch from pricing oil in dollars to euros, the notion has taken on momentum since the steep fall of the dollar has started to pinch the huge dollar reserves and investments of foreign countries like Saudi Arabia and China.
Even OPEC states that are normally allied with the U.S. have started to move away from the dollar. The United Arab Emirates says it is diversifying its investments and moving 10 percent of its currency reserves out of dollars into euros. The $50 billion Qatar Investment Authority is looking to buy assets in Asia to counter a weak dollar.
The Gulf Cooperation Council, which includes Saudi Arabia, the United Arab Emirates and Qatar — three moderate members of OPEC — will discuss a proposal to stop linking their exchange rates to the dollar at a meeting in Doha, Qatar, next month.
“The dollar peg is doomed,” said Jim Rogers, chairman of Rogers Holdings and a former George Soros hedge-fund partner who has been leading the charge against the dollar in international currency markets.
At its meeting over the Nov. 1718 weekend, OPEC directed finance ministers to study the possibility of a switch that would price oil against a basket of major currencies instead of the dollar. The vote was not made public, but it appears to have included Nigeria and Iraq — key U.S. suppliers — as well as Iran and its outspoken allies.
The move by the cartel is already having an effect on the markets, encouraging investors to step up bets on a weaker dollar and higher oil prices. Premium crude prices came close to hitting the $100 mark Nov. 21, setting a record intraday price of $99.29 before falling back to end at $97.29 in New York trading. But the dollar skidded to a new record low of $1.4855 against the euro.
“It looks like the OPEC meeting was more important for the currency market than the oil market,” said Eric Wittenauer, an energy analyst at A.G. Edwards & Sons Inc.
U.S. consumers are starting to feel the pain of near-triple-digit oil prices, with prices at the pump now well over $3 a gallon and home-heating bills due to hit records. Many analysts predict gasoline will hit new highs this winter.
“So far, consumers have done an amazing job of ignoring high oil prices,” said Standard & Poor’s chief economist David Wyss. They could finally flinch this winter, he said.
The biggest threat to the U.S. economy may lie under the surface, where hundreds of billions of petrodollars from oil sales in the Middle East have found their way back into the U.S. economy through purchases of U.S. Treasury bonds.
The Gulf oil states wash their petrodollars through London brokerages that purchase the Treasury bonds en masse. In the last year, they have accounted for nearly all of the $208 billion of U.S. government bond purchases by foreigners, said Harm Bandholz, economist with Unicredit Markets.
“At a time when many eastern Asian countries, notably China and Japan, are selling U.S. Treasuries, the market for U.S. [government bonds] is becoming more and more dependent on petrodollars,” he said.
If the oil states stop purchasing U.S. bonds and put their money elsewhere, that could create a financial bind for the U.S., analysts say, by driving up the interest rates on Treasuries and other debt at a time when the economy is weakening.
Hot commodity: Traders worked in the crude-oil options pit at the New York Mercantile Exchange on Nov. 21. Crude prices set a record intraday price of $99.29 before ending at $97.29.