The US Dollar Index (which measures US$ performance against a basket of leading currencies) has been falling rather sharply of late, coinciding with an inverse rise in the price of crude oil, which last traded above $82 a barrel on Wednesday in the U.S. compared to a low-$70 trading level a month ago. Day-to-day the volatility not just in the prices of financial instruments, but also in the accompanying roller coaster analyses by the business press and among the so-called experts including market analysts, economists, and investors, adds fuel to the uncertainty surrounding the fragile global economy. In this article, TradeFlow21 wants not so much to join the dubious and perhaps fruitless debate, but rather to provide readers with a concise thought-provoking angle.

The Daily Star of Beirut, reports today that “the improvement in oil prices and projections that they could increase further would largely benefit Gulf crude producers, however, they carry risks of return of high inflation to the region,” according to National Commercial Bank (NCB). What’s highly interesting here is that the Gulf producers obviously want to earn as much per barrel as possible, however, after a certain (sustained) level, say $100/bbl, problems arise due to the weaker dollar (remember oil is priced in dollars), since most of the Gulf Cooperation Council members peg their currencies to the dollar, and thus they will face the challenge of rising domestic inflation from the massive dollar inflows subjected to higher import prices.  Therefore, the producers must somehow achieve a desirable level, say between $80 and $85/bbl (remember their respective national budgets are based on levels as low as $40/bbl), and thus, with an already weak dollar and an abundance of global economic uncertainty, they will utilize their excess production capacity to cap the upside in hopes of maintaining the said lucrative price range.

TradeFlow21 is not keen on collusion, but it turns out that should the dollar’s value erode further due to a rightfully perceived multi-front deficit death spiral in the face of quantitative easing, and if crude continues to climb over the wall of economic worry turbocharged by the same quantitative easing, then a little cooperation among the GCC is good thing if it keeps a lid on oil prices. It’s a win-win, for now and near-term, since oil at where it trades now means hard cash for the producers (with some purchasing power to boot), and in the U.S. it means averting a repeat of the oil price spike of 2008. Such circumstances suggest the possibility of a real recovery, as the GCC is able to continue to both make oil-related investments and diversify their respective economies and financial investments; and the U.S. can keep the price of a key input under some sort of control.

So oil at $80 is not necessarily a bad thing, since it could be much higher, or on the flip side, it could even flirt with $30 again, in either case effectively reintroducing “it’s the end of global trade” scares again.

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