16 January, 2008: Much of the coverage of U.S. President George W. Bush’s jaunt to the Middle East has focused on two themes: pushing forward the Israel-Palestine peace process and further isolating Iran. Yet there are also economic issues on the agenda, not the least because of the worsening economic situation in the U.S.
At meetings with a number of leaders in the region, Mr. Bush raised the issue of ballooning energy prices, noting that high gasoline prices were lowering disposable incomes and weakening the U.S. economy. Indeed, the cost of oil increased inflationary pressure in 2007—hardly surprising given the U.S. consumes 15% of the world’s oil every day—and thus increasing speculation about a possible recession.
At least in Saudi Arabia, Mr. Bush’s request looks to have been pushed aside as the kingdom’s oil minister and de facto leader of the Organization of Petroleum Exporting Countries (OPEC), Ali al-Naimi, stated: “We will raise production when the market justifies it.” Mr. Naimi also fingered speculation for increasing the price of oil by $20-30 a barrel.
Keeping this in mind, think back a few weeks when I wrote about Arab countries holdings of depreciating U.S. dollars. In particular, I was interested in what might happen if central banks began to diversify their holdings away from the greenback in search of better returns and economic security. Indeed, the dollar has continued its bumpy slide as the U.S. economy has weakened and speculation about further possible interest rate cuts. At the time though, Saudi Arabia did not want to de-peg or even revalue its currency’s ties to the dollar.
Yet now, the chief economist of Saudi Arabia’s largest state bank suggested inflationary fears could lead to a shift in policy away from dollar-dominated securities towards “other types of assets across regions and in different currencies in order to maximise returns…” Mr. Alshaikh also advocated the establishment of the sovereign fund similar to the China Investment Corporation.
This statement was by no means official and certainly not a definitive shift in policy. On the other hand it does show that if (or when, depending on your point of view) the U.S. economy stumbles there will be some serious strategic decisions to be made in capitals around the world.
As I wrote in early December, if key U.S. allies decided to shift away from the dollar, “at what point would China start feeling uneasy sitting on $1.4 trillion of depreciating reserves? What about Japan with $1 trillion in reserves? Any adjustment in policy in these countries would be a serious problem for the U.S. economy, which is already suffering from high oil prices and the credit crisis.”
I think that the same questions remain pertinent, and unanswered. So what do you, loyal readers, think now that the economic situation is gloomier, oil prices likely to remain high at least in the near term, and the subprime crisis still reverberating around financial markets?
Send us your thoughts at editors@diplomaticourier.org. |
