November 17, 2007
Saudi Arabia defends the dollar
The most bizarre event so far of the third Opec summit in Riyadh, which properly gets under way today, was the accidental broadcast yesterday of about half an hour of the proceedings of the private meeting of energy, foreign and finance ministers, discussing the idea of including a mention of the weak dollar in the summit’s final declaration. The footage was shown on the widescreen TV in the press room, and it is rumoured, right through the TV system in the Intercontinental Hotel, where the meeting was being held, until Saudi officials worked out what was going on - possibly alerted by wire service reports - and rushed to pull the plug.
The most sensitive comments were made by Saud al-Faisal, the Saudi foreign minister, who warned of the danger of a dollar "collapse" if the final statement mentioned the dollar. "Just indicating that we have charged finance ministers with studying this issue … would mean a decision taken by Opec would have the opposite effect and the media would pick up on this point," he said, in Reuters’ translation. "And then perhaps we would find that the dollar had collapsed, instead of us having done something in the interest of our countries."
His point was that any signs the group is further cooling on the dollar as the currency in which oil is priced - and more importantly, in which oil wealth is held - would alarm currency markets and trigger further dollar sales.
It is an embarrassing point to be caught making in public, in part because it carries a suggestion of Saudi politicians defending US interests. But in fact, defending the dollar’s value is an important policy objective for Saudi Arabia for purely selfish reasons. As Adam Robinson and Edward Morse of Lehman Brothers pointed out in a great piece in the FT last month, the weak dollar is already undermining the value of Saudi Arabia’s $800bn in dollar reserves. The Kingdom certainly does not want to weaken it any further.
Accidentally broadcasting the proceedings of a private meeting of OPEC could presumably have been embarrassing on some aspects of their deliberations but Opec discussion of the relative weakness or strength of the US Dollar must be a routine subject of their discussions. If OPEC wish to maximize the price of oil to the extent that is consistent with a stable world economy, they should take into account the trade weighted strength of the pricing currency and avoid unnecessary statements that would reduce the purchasing power of that currency.
It is not correct to imply or assume that an OPEC discussion on the strength of the pricing currency has anything to do with decisions on the currencies in which oil wealth is held, such decisions being made entirely at national rather than OPEC discretion and being made subject to different national criteria. Saudi Arabia is free to decide in which currencies it wishes to hold its $800 billion equivalent of currency reserves. It doesn’t need to influence OPEC to maintain the value of those reserves, Saudi Arabia and all other OPEC members can diversify the currency denomination of their reserves whenever they wish.
In the case of Saudi Arabia and their Gulf neighbours, the values of their national currencies are also pegged to the US Dollar, an arrangement that has allowed some diversification of gulf nation economies that would not be easy if they adopted floating exchange rates with currency volatility geared to oil price volatility. It could be argued that for any nation with a currency pegged to the US Dollar and a desire to diversify their economy their “selfish” interest might be to see an even weaker US Dollar.
Posted by: Ironybrew | November 25th, 2007 at 3:43 pm | Report this commentI think it is not the point of defending mine, yours or somebody else interests. A serious crisis of the dollar could affect all the world economy.
Pierluigi Rotundo
Posted by: Pierluigi Rotundo | November 29th, 2007 at 12:32 am | Report this commentDear all,
Over the holiday season the comments posted to the blog will be pre-moderated by FT staff. This may result in a delay in your comment appearing, but we will keep these delays to a minimum. We will return to post-moderating comments at the start of 2008.
Many thanks for all your contributions, and best wishes for the season.
Posted by: Damian Carrington, Interactive Editor, FT.com | December 21st, 2007 at 2:51 pm | Report this commentDear blog readers
First of all, happy new year to you all.
Following the holiday season, comments are now back to being post-moderated, as before.
I look forward to reading your valued contributions in 2008.
Posted by: Damian Carrington, Interactive Editor, FT.com | January 2nd, 2008 at 11:46 am | Report this commentDamian Carrington, Interactive Editor, FT.com
Posted by: Firozali A .Mulla MBA PhD | March 1st, 2008 at 12:01 pm | Report this commentSame to you A happy leep year or a leap year to you. can we talk now about the oil and Saudi’s stand onthe fal
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than u 4 new year xpensive is it not?
Firozali A. Mulla MBA PhD
P.O.Box 6044
Dar-Es-Salaam
Tanzania
East Africa