Oil prices have been incessantly shooting up to a record high of more than $100 per barrel; and oil-rich Gulf countries – which supply 22 percent of the world's oil – sit by idly and enjoy the windfall of dollars. Between 1997 and 2001, the region's total revenue from oil exports mounted to $750 billion; and the five- year period within 2002 and 2006 witnessed the revenue double to $1.5 trillion.
It is considered a new version of the "Arabian Nights Tales," as well as the recent success of the oil-for-dollar policy adopted by the Middle East region for ages.
However, the record oil prices may inevitably be a mixed blessing to the oil-rich Gulf, as the two runaway trends—inflating oil prices and plunging dollar—are hitting the world. As the specter of inflation hovers over the global economy– without exception – the Gulf region will be affected. In fact, inflation rates in the Gulf region are reaching record levels, with Qatar having the region's highest inflation currently at 13.74 percent. Levels have hit 7 percent in Saudi Arabia: the highest in 27 years; and a 19-year peak of 9.3 percent in the United Arab Emirates in 2006.
Some analysts observe that "the dollar peg is doomed," and pointed out that inflation in the Gulf region is accelerating at the fastest pace in at least five years because their central banks follow U.S Federal Reserve policy, and as a result of the sinking dollar.
Speaking at an investment conference on February 25, 2008 in Saudi Arabia, Alan Greenspan, the former chairman of the US Federal Reserve (the Fed), said the pegs restrict the region's ability to control inflation by forcing them to duplicate US monetary policy at a time when the Fed is cutting rates to ward off an economic downturn.
In fact, the Gulf countries have long been bogged down by one dilemma: whether to keep their national currencies pegged to the dollar as a single anchor currency, or opt for an alternative.
Obviously, the dilemma is profound and has far-reaching implications, especially when the single anchor is no longer strong enough to stabilize the monetary system amidst a deteriorating monetary environment.
Like Hamlet, the oil-rich Gulf nations have to ponder: to peg or not to peg.
Abandoning the peg would risk driving crude oil prices higher for the US – the largest oil consumer – but would also mark the increased wealth and power of oil producers. The Gulf countries have never had an independent monetary policy. Before pegging currencies to the dollar, much of the region was under British influence.
Many Gulf bankers defend the dollar peg, which they believe has helped Gulf States attract foreign investment. Sultan Nasser al-Suweidi, the UAE central bank governor, said "it did very well for our economies because it has led to more capital flow."
Should history repeat itself, we will be reminded that in 1973 the US went through a similar depreciation in currency. Then Secretary of the Treasury, and former Texas governor, John Connolly, said "the dollar is our currency and your problem." In a globalized economy, however, the dollar is everyone's problem.
Therefore, what is facing the Gulf oil producers is not only a sea of wealth, but also its undercurrents—a rushing recycling of their revenue into the Western pocket. Additionally, progress made to diversify their economies will be stunted; and the Gulf region will remain dependent on the export of a single commodity which will hamper economic development in the long run.
By People's Daily Online
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