Sunday, November 18, 2007

Oops

Oil leaders' private debate televised by mistake:
A private meeting of Opec leaders, gathered this weekend in Riyadh for the cartel's third meeting in its 47-year history, had just been broadcast to the world's media for more than half an hour after a technician had mistakenly plugged the TV feed into the wrong socket. The facade of unity that the cartel so carefully cultivates to a world spooked by soaring oil prices was shattered.

Sometimes, such innocent mistakes can have far-reaching economic and political consequences. Commodity and currency traders said this weekend that oil prices would surge again tomorrow - possibly breaking the $101 per barrel record set in the late 1970s [Editor's note: that figure refers to what oil would have cost if adjusted for inflation to present day reality] - while the already battered dollar would fall further on the back of the unintentional broadcast.

On Friday night, during what the participants thought were private talks, Venezuela's oil minister Venezuela Rafael Ramirez and his Iranian counterpart Gholamhossein Nozari, argued that pricing - and selling - oil using the crippled dollar was damaging the cartel.

They said Opec should formally express its concern about the weakness of the dollar when the cartel makes its official declaration at the close of the summit today. But the Saudis, the world's largest oil producers and de facto head of Opec, vetoed the proposal. Saud al-Faisal, the Saudi foreign minister, warned that even the mere mention to journalists of the fact that leaders were discussing the weak dollar would cause the US currency to plummet.

Unfortunately his words and those of everyone at the meeting were being broadcast via a live television feed to a group of astonished reporters. 'I couldn't believe it,' said one who was there. 'When I realised they didn't know they were being broadcast live, I frantically started taking notes.'
I'm no Carnac the Magnificent, but between that news and other rumblings of discontent regarding the US dollar will not bode well for its status as the "reserve currency." In the short term, get used to triple digit figures for oil and more record lows for the dollar - most likely this week. One thing my dad taught me is that what drives the economy almost entirely psychological - and we're not exactly talking judgment and decision making based on rules of formal reasoning. No, we're talking about a phenomenon that is largely emotion-driven. In this case, with the dollar's decline, we see a positive feedback loop in the making. Once the dollar fell beneath some threshold, those stuck with the increasingly worthless pieces of paper began looking for ways to get rid of them, thus causing the dollar to fall further, causing further discontent, etc. Once a positive feedback loop gets started, it's pretty difficult to break. What amazes me is that the dollar held its status with minimal complaint for as long as it did. Of course I'll mention my usual disclaimer: I'm no economist; I'm merely a layperson trying to use a little common sense. Don't trade all your dollars for Euros or Yuan based on something you read on a blog.

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