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High oil prices are again transforming oil-exporting economies. Economies that were moribund when oil hovered in the $20s for most of the 1990s—and at risk of bankruptcy when oil dipped to $10 a barrel in 1998—are now booming. A new generation of skyscrapers is rising in the Gulf, in St. Petersburg, and in Moscow. Government coffers in oil-exporting economies are overflowing with the governments’ (typically very large) cut from the oil windfall. Most oil-exporting economies now need an oil price of $40 a barrel to cover their import bill, including their bill for imported labor—up from $20 a barrel a few years ago. But with oil trading above $90 a barrel, they still have substantial sums available to invest in the rest of the world.
One feature of oil-exporting emerging economies, though, has not changed: their propensity to peg to the dollar. Apart from Kuwait, the oil-exporting economies that border the Persian Gulf peg to the dollar even more tightly than China. Other oil-exporting economies peg to a basket, often one composed mainly of the dollar and the euro. These economies are making a policy mistake. The oil-exporting economies that now peg to the dollar—or to a basket of currencies of oil-importing economies—would be better served by a currency regime that assures their currencies depreciate when the price of oil falls and appreciate when the price of oil rises. Those that are unprepared for a managed float should peg to a basket that includes the price of oil.
