This article was published in the Australian Financial Review, 7 July 2008, pg. 63.
Due to the current spike in global oil prices, significant criticism has been levied at hedge funds and commodity speculators. From the well of the United States Senate to the City of London, critics have suggested that the exponential rise in crude oil prices is due, in significant part, to self-interested speculators.
The America government has even attempted to stand-up to these malicious speculators, with a senatorial enquiry chaired by former vice-presidential candidate Senator Joseph Lieberman, which reports that global oil prices are inflated by 26% due to speculators.
However, the American government, is largely unwilling to admit its part in the rise of global oil prices and the ensuring inflation in key goods, particularly foodstuffs. Due to the downturn in American housing market teamed with the massive deficit spending on the Iraq war, the international value of the America dollar has deceased significantly in the last five years. This, in its own right, does not directly inflate the cost of crude oil. However, the currencies of Saudi Arabia, the Riyal, and the United Arab Emirates' Dirham are both pegged to the US Dollar.
The Riyal and Dirham has been pegged to the Dollar since 2003 and 1997, respectively. Whilst the real value of the Dollar has been decreasing, the pegging rate has stayed consistent, thereby decreasing the real international value of the Riyal and Dirham. This has caused significant inflation in both Saudi Arabia and the UAE, which forces higher oil prices in an effort to maintain the real value to oil-producing nations.
If the Saudi's and Emirati's were to float or, at least, change to the pegging rate of their respective currencies, the international community would see a significant drop in oil price. Based on the decline of the US Dollar, when compared to a benchmark of international currencies, in the last five years, this could amount to as much as 30% decrease in international oil price. However, this would cause a run on the US Dollar and significant political pressure, particularly by US Secretary of State Condoleezza Rice, has seen this proposal effectively killed.
From families in Manchester to farmers in the Philippines, the international community has paid a very dear price, particularly in rising food prices, for America's monopolistic protection of its stranglehold on the global oil markets. It is evident, as oil prices are rising in the US and the dollar is still falling, that this policy has failed and a float of the Riyal and the Dirham needs to be seriously considered. The negative-feedback loop of higher oil prices, higher inflation and lower growth can only be cured by a radical shift in policy. Speculation has increased global oil prices, but the primary culprit is at the US State Department not the City and Wall Street.
Aron Ping D'Souza
Tutor in Political Economy
The University of Melbourne
Australia
