It has been estimated that 60 per cent of the gulfs

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Unformatted text preview: , and also by potential opponents, collaborators, and by-standers. In general, the militarization of energy security needs to be envisioned as occurring within a context of strategic anxiety and severe economic stress, in which economic productivity is far below what people are used to, and in which the perennial peace-time trade-offs between guns and butter had become correspondingly more contentious. Such conditions have arisen before, in the 1930s, when the developed world’s demand for security increased rapidly, under conditions that made the relative social cost of that security extremely expensive. It remains difficult to this day to see how war could have been avoided under such circumstances. 202 Oil DDW 2012 1 Low Prices Good – Dollar 203 Last printed 9/4/2009 7:00:00 PM Oil DDW 2012 1 Oil profits cause inflation that makes Gulf States diversify reserves, causing dollar sell-off Momani, Associate Professor in the department of Political Science at the University of Waterloo and the Balsillie School of International Affairs, 08 Bessma Momani, Associate Professor in the department of Political Science at the University of Waterloo and the Balsillie School of International Affairs, 9-08, [“Gulf Cooperation Council Oil Exporters and the Future of the Dollar,” New Political Economy, Vol. 13, No. 3, September 2008, relooney.fatcow.com/0_New_6432.pdf] E. Liu In this section, we consider the final GCC trigger that could undermine the US dollar: GCC diversification of its official reserves. The economic rationales for diversification are related to GCC efforts both to internally harmonise and integrate their economic policies and to diversify their oil-dependent economies. After successfully completing a customs union in 2003 and a common market in 2008, the GCC states have plans to unify their currencies by 2010.75This enhanced regional integration has contributed to members’ impressive economic growth, enhanced external trade and improved intraregional trade. Spurred by sky-rocketing oil prices, the GCC states’ official reserves are also ballooning. It has been estimated that 60 per cent of the Gulf’s asset portfolio is dollardenominated.76In choosing an appropriate reserve currency strategy, GCC policy makers will likely consider a number of economic factors: the valuation of the proposed monetary union’s currency; the GCC’s trading patterns; and the prospects for economic diversification. These three factors are discussed in turn. On the Gulf’s monetary policies, for decades many of the GCC countries had unofficial pegs to the US dollar.77Depending on US monetary policy had worked well for many Gulf countries because they were ‘small, open, and financially immature’.78However, with soaring oil prices, a falling value in the US dollarand acurrent US monetarypolicythat is counterproductive to Gulf interests, the GCC countries’ peg to the US dollar is now deemed to be a problem. In particular, inflation has become a serious domestic issue, particularly because most of the arid Gulf countries are highly dependent on food imports. Because of rising inflation, a number of GCC countries have faced domestic pressure to loosen the dollar peg. Consequently, the IMF has cautioned that unless oil exporters adopt an exchange rate regime that be...
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This note was uploaded on 01/30/2013 for the course ECON 101 taught by Professor Burke during the Spring '13 term at Southern Arkansas University.

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