President George W. Bush will be embarking this week on one of his presidency’s most crucial initiatives, a trip to the Middle East to advance the cause of peace between the Israelis and the Palestinians. The cause is noble, but often frustrating, and, as it is for the fisherman casting his line into the tide, the outcome is far from certain. But Israeli-Palestinian issues are outside the frame of reference of this blog.
In addition to his visit to Israel and the Palestinian territories President Bush will visit Kuwait, Bahrain, the United Arab Emirates and the Kingdom of Saudi Arabia--all America’s friends and all suppliers of some of its oil imports.
Meeting with Press Representatives
At his meeting in the White House with representatives of the Arab press from the four Gulf countries he will be visiting, President Bush said he will be discussing a new regional security plan. In fact, the leaders of these countries have a legitimate concern about Iran’s nuclear program and the country’s designs to spread its hegemony over the entire Gulf area with its enormous reserves of hydrocarbons. The Gulf leaders will seek assurances that the United States will not leave them in the lurch should their security be threatened.
But President Bush will find that the Gulf leaders have other concerns, as well, the primary one being the rapid depreciation of the dollar against other major currencies over the past few months. The Gulf countries’ oil is priced in dollars and their national currencies, with the recent exception of that of Kuwait, are pegged to the dollar, as well. The leaders of the two leading economies in the region, namely those of Saudi Arabia and the United Arab Emirates, have resisted domestic pressure to abandon the dollar peg as a reprieve from rising imported inflation. They have resisted the pressure for two principal reasons: first, they have been concerned that such a step would further weaken the dollar, which could affect the value of their assets, many of which are denominated in the US currency. But there has also been a political logic: they have not wanted to be seen as marching lockstep with the Iranian demagogue and his Venezuelan soul mate.
It is not obvious what President Bush can do to arrest the fall of the dollar, or indeed whether he wants to do that in the first place. But the President should keep in mind that he cannot offer security measures built on a shaky currency. The dollar is the symbol of American political and economic power in the Gulf countries and elsewhere, and its weakness undercuts American influence. An emaciated dollar cannot support a deterrence strategy or keep friends in tow.
President Bush is likely to ask the Gulf leaders to raise production of oil. But can they? And will they?
A most recent report issued by the Arab Fund for Economic and Social Development in association with a number of other organizations, including AOPEC [Arab Organization for Petroleum Exporting Countries] asserts that the confirmed global reserves of oil at the end of 2006 were 1,160.8 billion barrels, of which 668.2 billion barrels were in Arab countries. Ninety-three percent of Arab oil reserves are concentrated in five countries: Saudi Arabia (39.6%); Iraq (17.2%); Kuwait (15.2%); United Arab Emirates (14.6%) and Libya (6.2%). Iraq is seeking to increase its production; the other four Arab countries, however, are producing at almost full capacity, although Saudi Arabia has wiggle room. So the answer to the first question is yes, they can produce more, but not too much more.
As to the second question, whether they will produce more, the answer is a qualified no. The price of oil is high and may go even higher, and there is no reason for the oil-producing countries to be accommodating unless they conclude that current price level could trigger a recession in the US, which could spillover elsewhere. A global recession would cut the demand for oil and bring the prices below the producers’ control. Furthermore, there is an inverse relationship between the exchange rate of the dollar and the price of oil- a lower exchange rate of the dollar will translate into higher oil prices and a greater flow of liquidity into the acquisition coffers of these countries.