Recently Kuwait has decided to remove its currency from its US dollar peg, instead tying it to a basket of currencies. It was a fairly big announcement for everyone in the region.
All of the countries in the Gulf peg their currency to a fixed exchange rate to the US dollar (for example in Qatar 3.64 riyals always equals $1 US). This generally made sense to petrodollar countries since oil is bought/sold in US dollars on the open market. By fixing your currency to the US dollar you remove any risk that would come with the currency fluctuating.
Unfortunately the US dollar has been sliding/underperforming so much in recent years that it is starting to affect the region. Inflation has been high in recent years as it costs more to import goods into the region due to the Gulf currencies weakening against exporting countries, despite the fact that the Gulf countries have booming economies due to petrorevenue. And I’m talking serious inflation, on the order of 25-35% a year right now (estimates I’ve seen for Qatar have it at around 27% for 2006). There are plans in the works for a unified Gulf currency by 2010, involving Saudi Arabia, Kuwait, Qatar, Bahrain, UAE and Oman, all of which have pegged $US currencies, at which point the currency should be strong enough to ‘free-float’ on the currency markets. With Kuwait removing its peg experts believe that the unified currency is no longer going to happen.
In response to the peg removal Saudi, Bahrain, Qatar and Oman said they have no plans to do so but UAE has so far not said anything. Speculation is that they might follow suit and remove their peg. If that happens the unified currency is definitely dead.
What does this mean to you? Right now Kuwait is a significant oil producer but not enough to really impact global oil markets. If other Gulf countries follow suit then currency exchange fluctuations will affect the price of oil, likely making it more expensive for North Americans as the Gulf currencies gain against the US dollar. Well, maybe not Canadians since the Canadian dollar has also gained strongly against the US.
So I’ll try to keep an eye on this and let you know if there are further developments.
No need to panic and hoard gas though, I doubt the price would impact more than 5-10% even if all the Gulf countries removed their pegs.
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