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Re: “The Dollar Steps Down as the World's Currency

A few points...

It is not just because the dollar has lost some of its value that oil prices are up. Oil prices are up for everyone, and this impacts greatly in developing countries, especially in China, which, as you mentioned, has pegged its currency to the dollar. If we also take into account China's double-digit yearly GDP growth rate, we can see that there is sky-rocketing demand and limited supply. There's your price increase. Even with a stable dollar it would have happened.

I wouldnt bet that high oil prices are here to stay however. High oil prices are also the result of short-term mismatches between supply and demand. All it takes is a small global crisis, an economic "hiccup" for oil markets to shift out of balance leading prices to fall.
The price increases that have occurred during the past years are mainly due to Saudi Arabia's. It allowed their buffer capacity to fall during the 90's and the global failure to anticipate the growth in Chinese oil imports. The increased demand lead the Saudis to spend billions of dollars to build up their spare capacity. The key variable to watch is the spare oil production capacity maintained by the OPED cartel.
History suggests that the cartel cannot maintain perfect production discipline. Inevitably, some of the investments made about a decade ago in Russia, the Caspian and Western Africa are going to pay off as they are now coming online. So I'm guessing some greedy member will defy the leadership and cheat on their quotas, again, undermining the future of sky-high prices.

Posted by Peter on 02/04/2008 at 4:24 PM

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