Over the past few months, the US dollar has fallen about 15 percent in value against the euro and the yen. It is good news for the US economy; a falling dollar will boost exports and safeguard American jobs — bound to be a major issue in an election year. But it is bad news for the Gulf states.
The Kingdom’s principal source of revenue, oil, is priced and paid for in dollars — which means that its value has dropped by that same average 15 percent. It would not be a problem if imports all came from the US. But while the US is the Kingdom’s biggest supplier of imports, it is closely followed by the EU (imports largely priced in euros) and Japan (imports priced in yen). The slide in the value of the dollar has inevitably increased the price of Saudi imports.
Fortunately, this year, that will be more than offset by the consistently high price of oil resulting from the Iraq crisis. This year’s budget was based on an assumed price of $17.50 a barrel. In the event, it has been at least $10 a barrel higher for well over a year. As a result Saudi Arabia has earned around $80 million a day over and above expectations. This means at least an extra $29 billion in government coffers this year. It should transform the planned SR39 billion ($10.4 billion) budget deficit into a shining surplus, even though the import bill is bound to increase because of the dollar’s slide.
However, high oil prices will not last forever. Once Iraq is seen heading toward stability and Iraqi oil exports start climbing back to pre-sanctions levels, the price will drop. It may well settle near the $17.50 a barrel on which Saudi treasury officials based expectations of revenues for 2003. Additionally, there is an expectation that the dollar will drop a further 10 percent between now and the spring. Together, these make for a massive budgetary headache ahead, not just for Saudi Arabia but for all oil exporters.
Is it not time, then, to stop pricing oil in dollars? Why not treat it as a currency in itself, with the oil-barrel floating against other currencies? It works with yellow gold. Why not with black gold? It would certainly protect against a weak dollar.
The other now pressing issue is whether the riyal should disengage from the US dollar. A declining dollar is going to affect not only the budget of Gulf states. Gulf businesses and consumers are also going to be hit as the cost of imports from Europe and Japan rises.
A declining dollar is in American interests but not ours. Our economies are very different; we do not need to boost exports. Can we allow the Gulf economies to be subject to US domestic considerations over which we have no control? The answer therefore surely has to be no.
