22-11-07

Mahmoud Ahmadinejad, president of Iran, reckons he has pinpointed the soft underbelly of the US: the dollar. He urges OPEC to consider pricing crude oil in other currencies.
Iran can invoice its oil customers in cowrie shells if it likes, but that would not change the underlying value of the product. Shifting oil markers to other currencies would only make for inefficient markets. It could potentially hit the dollar, although only through secondary effects: by knocking confidence and spurring diversification of global foreign exchange holdings.

The key player in OPEC is Saudi Arabia. The dollar's slide, exacerbated by the riyal's peg to the currency, has increased Saudi inflation, but this is still some way below rates in other Gulf economies.
Saudi Arabia has faced periods of dollar weakness several times before. It would have to weigh the temptation of a wholesale riyal revaluation or dumping of dollar assets against the risk of destabilising the economy of the US, which is simultaneously the world's largest oil consumer and ultimate guarantor of Saudi's security.

Iran's political motivation for undermining the dollar is clear. That both Iran and its petro-ally Venezuela are struggling to meet even their own OPEC production quotas also explains their hawkish stance on output.
Saudi Arabia has agreed to a vague commitment by OPEC to "study" Iran's proposals. This suggests it is trying to accommodate the group's divergent economic and political aims. Riyadh also boosted funding for greener, but still oil-based, energy initiatives, betraying an awareness that high prices are spurring energy diversification efforts elsewhere.

Rather than fiddling with the dollar, Saudi Arabia's small concession on wording may be designed to secure consensus on more pressing issues -- namely, OPEC's need to increase output and boost long-term investment in new fields to slow the search for alternatives to oil.

Source: gulfnews.com / Financial Times