The Buck Stops Here...

Ministers from the Organization of Petroleum Exporting Countries (OPEC) gathered last week and over the weekend in Riyadh, Saudi Arabia with much to celebrate as oil prices move ever closer to $100 per barrel.

OPEC is set to reach $685 billion in total crude oil export revenue this year, a jump of nearly 10% from 2006 levels. And next year, OPEC’s oil riches should surge past $760 billion up another 16%, according to estimates from the U.S. Energy Information Administration. Oil revenues are up 19% this year for Saudi Arabia, OPEC’s biggest exporter. Kuwait’s oil export sales are up nearly 27%, and in the UAE crude oil revenue is soaring 32.6% over a year ago.

One of the byproducts of OPEC’s oil riches is a newfound desire among members to decouple themselves from the sinking fortunes of the U.S. dollar. Many oil-rich OPEC states in the Middle East have had their own currencies pegged to the U.S. dollar for some time. And nearly all OPEC members price their oil exports in dollars in the global marketplace. But that may not be the case for long.

The Sinking Dollar is a Drag on Gulf States

The U.S. Dollar Index traded recently at a record low against a basket of other major currencies, “the weakest level since the index started in 1973,” according to Bloomberg. The historic slide in the greenback has triggered talk that the Persian Gulf states may consider dropping their peg to the dollar.

Bloomberg news reported yesterday that “the six member countries of the Gulf Cooperation Council (GCC) that includes Saudi Arabia and Kuwait will discuss a proposal next month to revalue their currencies.

In fact, a proposal “to change the value of the currencies of the Arab nations” is on the docket for a meeting of the Gulf Cooperation Council scheduled for early December.

Saudi Arabia, OPECs biggest producer with historic political ties to the U.S. has long resisted such a move, but it may be just a matter of time. As the dollar falls further, even the Saudi royal family is feeling the heat.

Imported Inflation Thanks to the Dollar Peg

The falling value of the dollar is sparking inflation concerns in countries that maintain a peg to the buck. “Saudi Arabia's consumer prices rose at a record 4.9 percent pace in August, after averaging less than 1 percent over the last decade” according to Bloomberg. In fact, this process of diversifying away from the dollar is already underway.

“United Arab Emirates central bank Governor Sultan Bin Nasser al-Suwaidi said his bank has a target of moving 10 percent of its currency reserves into euros and has ``already diversified to some extent.'' The $50 billion Qatar Investment Authority said Sept. 4 it was looking to buy assets in Asia to counter a weak dollar.” Even global guru Jim Rogers, who has recently advocated moving assets out of the buck, has said “the dollar peg is doomed.”

In fact, GCC members have already broken ranks from the dollar club with Kuwait now linking its currency to a basket of foreign currencies including the dollar.  With a high probability of more Fed rate cuts to come, pressure will only increase inside OPEC for a landmark break from the buck.

When and if this happens, it will be an historic event in the history of global finance, and may mean the beginning of the end for the U.S. dollar as the world’s reserve currency.

And it may also give quite a boost to the GCC economy, which have been enjoying robust growth, but are struggling with inflation as a consequence of the falling dollar. Cutting the dollar peg should help cut back on imported inflation in the Middle East.