Saudi Oil and the US dollar

Last week the dollar began to recover in value as the Bush administration finally started making serious noise about a strong dollar policy. Now, right on the heels of that display, the Saudis finally agree to up production.

Both events were a bit long in coming, at least relative to the reasons stated by each party. The Bush administration claimed it was (finally) worried that imports would become too expensive if the dollar were allowed to continue its slide. They didn’t seem concerned the past several years as the dollar slowly dropped a third in value. After all, it was their policies that caused it. Similarly, the Saudis have been fighting production increases all the way as oil has quadrupled in value. But now $140 is the magic number where they start to care?

It leads one to think maybe the two capitulations are connected. After all, high oil prices hurt America. A devalued dollar hurts the Saudis, as oil is priced in dollars. Priced in Euros, for example, the Saudis aren’t raking it in as much as it would seem. Given how much they trade with Europe, the dollar’s fall has offset a lot of the increase in the price of oil, especially given that they probably have a lot of production costs that are priced in other currencies, squeezing them from both directions. So, we prop up the dollar to help them, they increase production to help us. Given the connection between the Bushes and the Saudis, maybe the two governments finally addressing these longstanding problems at the same time is not a coincidence. Nor, perhaps, is it a coincidence that this coincidence happens during a presidential campaign.

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