Oil greas­ing dol­lar’s skid: OPEC’s move adds to woes of cur­rency, econ­omy

The Washington Times Weekly - - National - By Pa­trice Hill

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.

Bloomberg News

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.

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