Record oil prices provide protection against the weak U.S. dollar in Arab Gulf countries, which are not expected to price their oil in any other currency, and, with the exception of Kuwait, are unlikely to abandon the dollar peg for their currencies at this stage, according to analysts. The rise in oil prices over the past three years has offset the effect of the weak dollar on Arab Gulf economies, even though Gulf countries sell oil in U.S. dollars and have pegged their currencies to it, say economic analysts. "The weakness of the dollar is obviously impacting the way in which the economies perform," said HSBC's Middle East economist Simon Williams in Dubai in the United Arab Emirates (UAE). "But when you have oil prices running at, what, two, three times their five, ten year average, the Gulf economies are going to do very very well. The UAE is still prospering, the UAE is still a very good place to be doing business. These are good times for the Gulf despite the weakness of the currency," Williams told Reuters in an interview. The dollar has fallen to 15-year lows against a broad basket of currencies, and oil prices hit a record $78.77 (USD) a barrel on August 1. Despite the weak dollar, the world's largest oil exporting country, Saudi Arabia, is not expected to start selling its oil in any other currency, according to John Sfakianakis, Group Chief Economist At The Saudi British Bank (Sabb) in Riyadh. "I think that the current regime will be maintained and Saudi Arabia will continue to sell its oil in U.S. dollars. We don't foresee any change of that in the coming years," says Sfakianakis. The weak U.S. dollar and the fact that oil is priced in U.S. dollars means that the real or actual rise in oil prices over the past three years is not as steep as it would have been had the value of the currency not fallen over the same period. Analysts have said the dollar's decline on global markets is driving up inflation in the Gulf, where most currencies are pegged to the dollar, and Kuwait unshackled its dinar from the tumbling U.S. dollar in May and switched the exchange rate mechanism to a basket of currencies. Kuwait's central bank said the dollar's slide against other currencies had forced it to break ranks with fellow Gulf states to contain inflation from the rising cost of some imports. "We believe this is a wise policy and we support it. It is a positive move which was long anticipated," said Naser al-Nafisi, economist and general manager at al-Joman Economic Consultancy in Kuwait. "And we hope the other member states of the Gulf Cooperation Council -- because they are our brothers -- will follow suit, not simply because Kuwait made this decision, but because it is the right decision to make, and it will lower inflation in Gulf Cooperation Council countries," he continued. But Oman and Bahrain, the two smallest Gulf economies, and Saudi Arabia, the largest Arab economy, have said they plan to stand by their pegs. Sfakianakis says inflation in Saudi Arabia is mostly caused by internal rather than external, dollar-related causes. "We do not believe that Saudi Arabia faces the same challenges as in the case of Kuwait. Kuwait has been facing the challenge of imported inflation. Saudi Arabia's inflationary pressures, which we expect will subside in the coming months, are not due to imported inflation. Saudi Arabia is facing inflationary challenges more due to the growth of the domestic economy and the boom that the economy is facing rather than imported inflation," says Sfakianakis. Saudi inflation rose to a five-month high of 3.1 percent in June as food and housing costs climbed, official data showed. Saudi Arabia's nominal GDP has roughly doubled in size since 2001 on a near tripling in oil prices in the five years to July 2006. Yet some analysts believe the weak U.S. dollar might, eventually, prompt other Gulf countries to abandon the dollar peg. ''When you look at the growth phase that the Gulf economies in general and the UAE economy in particular is passing through, you look at how weak and at how much value the dollar has lost over the last year or so, it's a debate that they can't avoid," says Williams, who is based in Dubai. "I think there's also a sense that the Gulf economies are perhaps going into a new era. The dollar peg... is maybe beginning to be seen as a thing which belonged to a different time, a time when the Gulf couldn't stand on its own two feet. Those days are past, the Gulf economies are large, robust, resilient and perhaps are reaching a point where they want more control and more autonomy over the way in which their currency is valued and, crucially, the way in which monetary policy is set as well," Williams explains. Except for Kuwait, Gulf currencies trade within a narrow range around their pegged rates. The Saudi riyal has remained stable at 3.75 to the dollar since June 1, 1986 and was officially pegged to the dollar at 3.75 to a dollar in January 2003. The UAE dirham has been fixed at 3.67275 to the dollar since November 1997. The Omani and Qatari riyals and the Bahraini dinar have effectively been pegged to the dollar since the early and mid-eighties.
