by Patrice Hill

19-11-07

Iran and Venezuela urged OPEC to express its concern about the rapid decline of the dollar and the effect it is having on oil prices, but the move was squelched by Saudi Arabia out of concern it would accelerate the dollar's fall and threaten the wealth of Gulf oil states.
"This is a sensitive issue. It will cause the dollar to drop further, thus complicating the problems we are facing from the dollar's fall," Saudi Foreign Minister Prince Saud Al-Faisal said at a meeting of the Organization of Petroleum Exporting Countries in Riyadh in an exchange with the Iranian delegate that apparently was mistakenly broadcast on closed-circuit television.

Since oil and other major commodities have been priced in dollars for decades, the dollar's weakness has become a headache for both oil producers and consumers. For US consumers, it has helped cause successive record highs in oil and gasoline prices each year as producers strive to maintain their purchasing power in euro by raising the price of oil.
ExxonMobil recently estimated that the dollar's fall in the past three years has added about $ 25 to oil prices. The dollar's drop against the euro has been particularly large, at nearly 67 % since 2002.

For major oil producers, the dollar's defeat has cut into the value of their oil earnings and imperilled the large cash reserves they maintain in dollar investments, prompting some states such as the United Arab Emirates to find other currencies and investments for storing their oil wealth. African and Middle Eastern oil producers also purchase more goods from Europe than from the US, and thus have little use for a declining dollar.
Iran and Venezuela have waged a verbal campaign for years to break away from dollars and price oil in euro as a way of punishing the US for political reasons and to damage the dollar's dominant status. But the issue has taken on new resonance as producers and consumers around the world grow increasingly uncomfortable with the dollar's fall and irate about the soaring cost of oil.

Having failed to win OPEC's endorsement for a new pricing regime, Iranian Foreign Minister Manouchehr Mottaki proposed that OPEC express its concern about "the continued depreciation of the dollar". The proposal was endorsed by Venezuela and Nigeria, both major suppliers of the US.
"The reality is we have this problem," Mr Mottaki said. "I think we should draft the declaration to reflect our concern."

But the Saudi minister said the step could potentially backfire by rocking world currency markets.
"There will be journalists who will seize on this point, and we don't want the dollar to collapse instead of doing something good for OPEC," he said before Saudi authorities turned off the closed-circuit camera that carried the conversation, reported by wire services in Riyadh.

Whatever policy OPEC ultimately adopts on the dollar will be critical, as OPEC's 12 member states collectively produce more than 40 % of the world's oil and have regained effective control overoil prices in recent years as markets have grown increasingly tight. The group is dominated by the largest producer, Saudi Arabia, which also is the most moderate and pro-Western. Since Venezuela turned against the US with the election in 1999 of President Hugo Chavez, the kingdom has played a critical role fending off proposals from hawkish members who seek to maximize oil prices and revenues.
While Saudi Arabia retains veto authority, the anti-American majority in the cartel gained strength as Ecuador was welcomed back into the organization after having withdrawn in 1992 during a period when it was embracing free markets. Ecuador last year emerged as a key ally of Mr Chavez when it elected a president with similar ideals, Rafael Correa.

Source: www.downstreamtoday.com / The Washington Times