Oil Prices Too High

Persistently high oil prices would ultimately lead to reduced demand as the global economy slowed down.

Oil prices at their current levels risk damaging global growth and harming the incomes of Persian Gulf oil exporters over the medium term, the governor of the Central Bank of the UAE said.
Sultan bin Nasser Al- Suweidi said he did not expect oil prices--which touched $60 a barrel earlier yesterday--to fall much over the rest of the year.
Al-Suweidi urged oil producers and consumers to agree a strategy to boost refinery and extraction capacity, saying persistently high oil prices would ultimately lead to reduced demand as the global economy slowed down.
“I don’t think it’s a good thing for the UAE. I don’t think it’s a good thing for the (Persian Gulf) countries. I think it will stifle economic development that is going on in the world and will lessen current growth, and that is not good for our economies,“ Al Suweidi said.
“That will affect negatively oil consumption and cause prices to go down in the medium term, like we have seen in the past,“ added Suweidi, who was attending an Arab banking conference in Frankfurt, tradearabia.com reported.
While he did not want to give a forecast for oil prices at the end of this year, Al-Suweidi said: “I don’t think there will be a major reduction.“
Al-Suweidi expects the UAE’s economy to continue to grow strongly this year while oil prices stay high.
“I would expect not less than 10 percent economic growth--like China,“ Al- Suweidi said, adding that similar growth was possible in 2006 if oil prices remained supportive.
While the UAE has been one of the most successful Persian Gulf states in diversifying its economy--Al-Suweidi expects the non-oil sector to grow by nine percent this year--it is still heavily reliant on oil export revenue.
A fall in the US dollar, in which oil is priced, against the euro, with which the UAE has to pay for many imports, led to higher-than-normal inflation of around five percent last year, Al-Suweidi said.
He expects inflation of about three percent this year.
But the increasing strength of the euro over the past year has not tempted the UAE to diversify its foreign exchange reserves significantly away from the dollar, or to reconsider the dirham’s peg to the US currency.
“We did not come to the conclusion that the US dollar cannot serve our purposes. It can still serve our purposes in a major way,“ he said.
However, the future of the dollar peg will be less certain if the UAE and the five other members of the (P)GCC--Saudi Arabia, Kuwait, Bahrain, Qatar and Oman--stay on track to introduce a single Persian Gulf currency by 2010.
The six countries agreed in December 2001 to unify their currencies, which are all pegged to the dollar, by the start of the next decade, and Al-Suweidi is confident that this date is realistic from a technical point of view.
Issued currency will start off being pegged to the dollar, and 100 per cent backed by foreign reserves, around 80 percent of which will be in US dollars, Al-Suweidi said.
Over time this should change.
“I think the tendency is to move from the single currency peg to a floating (P)GCC currency. I would expect 2015,“ he said.
Al-Suweidi hopes the Persian Gulf currency can become an anchor for other Arab currencies, and promote currently limited trade and private capital flows between the Persian Gulf neighbors.
“It is in the national interest of the (P)GCC countries. It will go very well with the economic integration we are trying to fulfill. What we are trying to achieve is to create bigger companies and new companies and more jobs,“ he said.
Al-Suweidi also believes trade talks between the (P)GCC and the European Union are making more progress, but said the EU should not try to tie trade deals to human rights reforms.
“If we swipe aside irrelevant issues, we can get a deal faster. I don’t think the EU is so interested in these issues any more. (Issues) like human rights, democracy ... are not relevant to free trade.“