Weak US Dollar May Lead OPEC to Price Oil in Basket of Currencies


Well it finally happened. Behind closed doors, at a meeting closed to the public, OPEC’s ministers discussed whether to price oil in a basket of currencies instead of the late, great US dollar.

The conversation was supposed to be private. But audio and video from the conference room were left on. The media had a chance to hear Saudi foreign minister Saudi Al Faisal say, “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.”

Boy was he right. The media had a field day reporting about the feud between OPEC’s largest producer (Saudi Arabia) and OPEC’s largest provocateurs (Hugo Chavez of Venezuela and Mahmoud Adhmadinejad for Iran). This is better than reality TV. And there’s a lot more at stake!

Al Faisal, according to the Reuters’ translation, said that making public OPEC’s concerns about a weak dollar would have a negative affect. “And then perhaps we would find that the dollar had collapsed, instead of us having done something in the interest of our countries.”

“They get our oil and give us a worthless piece of paper,’” said Iranian President Mahmoud Ahmadinejad in public. “The dollar has no economic value.” And his sidekick Hugo Chavez, the lumbering socialist buffoon from Venezuela who’s expertly monopolised his country’s oil wealth and turned it into a political war chest added that OPEC should, “set itself up as an active geopolitical agent”.

Note to Chavez: OPEC has always been an active geopolitical agent, you moron. Oil wealth has turned the nomadic tribes of the desert in Saudi Arabia into accumulators of massive wealth and leverage over the global economy. Saudi King Abdullah realizes that what is good for global growth is good for OPEC. And that US$200 oil would not be good for global growth, thus, not good for OPEC.

The King said in a speech that, “Oil is an energy that is about construction and development and should not be turned into a tool of dispute and whimsy.” Paper currencies are for whimsy. Tangible goods like oil are essential to the global economy.

During its rise, OPEC’s influence over the oil price as even greater than today. Today, OPEC control’s 40% of world oil production and nearly 75% of oil reserves. OPEC can’t single-handedly swing the price of oil higher or lower by raising or lowering production. But its influence is still massive.

What will it do? The dollar’s decline poses a real problem. Sooner or later OPEC will have to switch to a basket of currencies that stabilises the oil price in something other than a depreciating currency.

For now, the weak dollar is passing inflation on to all those currencies linked with it. When the Fed cuts, the dollar peggers must cut too. It’s unleashed a tide of rising prices that has the finance ministers of the G20 concerned. “Rising energy and food prices will remain an important source of price pressures,” a draft of the G20’s statement is supposed to read.

Is there a housing bubble in Australia? You could dredge up a lot of data on either side of the issue. But the real test of the sustainability of house prices is affordability. Judging by the mail we’ve been getting, houses have never been less affordable in relation to the average Australian income.

The bridge between average incomes and average house prices is credit—a loan to make up the difference between your expectations and reality.

What else this Monday? The Doomers Ball on December 10th is nearly sold out. Unfortunately, we aren’t able to host an event in Sydney this year. Our apologies to readers in New South Wales. Maybe next year.

It’s a two-year anniversary, sort of. Two years ago this week we arrived in Melbourne. The ASX/200 is up 44% since then, from 4,577 to 6,593 at today’s open. BHP (ASX:BHP) was an AU$21 stock then. It’s up 92%. Rio Tinto (ASX:RIO) was a modest little AU$60 stock. It’s up 115% since then, with a healthy spurt since BHP’s merger proposal.

Dan Denning
The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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