The Organization of the Petroleum Exporting Countries (OPEC) said yesterday (Thursday) that it would keep production quotas at 24.845 million bpd and urge members to adhere to targets, as global demand has yet to return in full.

However, a report from the International Energy Agency (IEA) indicated that demand is recovering more quickly than previously thought, and that OPEC may be playing catch-up as the global recovery gathers steam.

The IEA increased its outlook for global oil demand by nearly 500,000 barrels per day (bpd) for 2009 and 2010, to 84.4 million and 85.7 million bpd respectively.

Perhaps the biggest reason for the increase was surging demand in China, where the Red Dragon’s $587 billion (4 trillion yuan) stimulus plan has resuscitated manufacturing and helped China grow into the world’s largest auto market.

China’s imports of oil hit a record high in July, soaring 18% from the month prior to 19.63 million metric tons, or about 4.64 million barrels a day, according to the nation’s General Administration of Customs.

China’s economy grew by 7.9% in the second quarter, and Beijing estimates 8% growth for the year, compared to an expected 3% dip for the United States.

Chinese demand for oil this year will grow by 2.8%, according to the IEA.

“I am more confident today than what I was back in May,” about China’s economic recovery, Saudi Oil Minister Ali Naimi told Bloomberg.

The rise of China has been a tremendous boon to OPEC – which controls 40% of the world’s oil supply – particularly since the financial crisis has crimped oil demand in developed nations around the world.

“We’re looking East more these days,” said Kuwaiti Oil Minister Sheikh Ahmad Abdullah al-Sabah.

The IEA expects demand for oil in North America to plunge 4.4% this year. However, that figure is an improvement from last month’s forecast of 5.1%, and could accelerate further as the recovery gains momentum.

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Data for gasoline and heating oil consumption in June showed a “hefty” increase in demand the IEA said. That data was further substantiated yesterday when the Energy Department reported a larger-than-expected drop in inventories.

Inventories dropped by 5.9 million barrels for the week ended Sept. 4 – more than three times estimates of analysts surveyed by Platt’s, the energy information arm of McGraw-Hill Cos, according to The Associated Press.

Indeed, even Saudi oil minister Naimi has acknowledged the bullish shift in the market.

“You guys must realize that there is a fundamental change in the market,” he told reporters ahead of the night-time meeting that agreed to keep supplies officially unchanged.”Economic growth is the name of the game, that’s what’s going to drive the price. As long as economic growth is there, the price is going to go up.”

Still, OPEC remained cautious, opting to keep production level until demand in the West returns to its pre-crash levels. Of course, that means the cartel will likely be playing catch-up, boosting production behind price increases as the economic recovery gains momentum.

Oil prices have more than doubled from their February lows, closing yesterday at $72.17 a barrel on the New York Mercantile Exchange (NYMEX).

Goldman Sachs Group Inc. (NYSE: GS) has raised its 2009 oil price forecast to $85 a barrel from $65 and said prices would reach $95 a barrel in 2010.

News and Related Story Links:

• Bloomberg News:
  OPEC Maintains Oil Quotas as IEA Raises Global Demand Forecast
• Money Morning:
  China Continues its Quest for Resources with $30 Billion CNPC Loan
• Money Morning:
  China Seeks to Dethrone the Dollar, Transforming the Yuan into the Dominant Global Currency
• Bloomberg News:
  IEA Raises 2009, 2010 Oil Demand Forecasts on Growth
• Money Morning:
  Oil Prices Due for a Short-Term Setback, Although Long-Term Outlook Remains Bullish
• Money Morning:
  Key Indicators Point to a Rough September for U.S. Stocks
• Fortune Magazine:
  Why Oil is On the Rise Again
• BusinessWeek:
  Behind Oil’s Surprising Surge

In the face of the worst worldwide financial crisis since the Great Depression, the Organization of Petroleum Exporting Countries (OPEC) is expected to cut crude-oil output and raise prices at an emergency meeting in Vienna tomorrow (Friday). But even with crude oil prices down more than 50% from their July record highs, friction between cartel members has analysts wondering just how big the prospective cut will actually be.

Oil prices continued their downward slide yesterday (Wednesday), dropping $5.22 a barrel, or 7.2%, to $66.96. Prices are down about 55% from the record high of $147.27 a barrel reached July 11. Crude’s dramatic plunge now has OPEC members scrambling to cut production and at least stabilize prices. The cartel members all agree that the outlook for demand has declined significantly. But there is a considerable amount of discord over the size of that cut.

OPEC members called for the emergency meeting – the cartel had originally been set to meeting Nov. 18 – so it might settle any of the production disputes between cartel members, even as it prepares for a global recession.

That will be easier said than done. Different OPEC countries have different economic models – with different oil-pricing floors – to keep their trade balances in check. PFC Energy estimates that Qatar, which imports just about $15 billion worth of goods a year and has little government spending, only needs oil to trade at $10 a barrel to keep its trade balance from sliding into the red.

At the other end of the spectrum, however, are Iran and Venezuela, which rely heavily on petrodollars to finance social programs and infrastructure development, meaning they need crude oil to trade at $100 a barrel or better. Little wonder those two countries have been the most vocal proponents of a large cut in production.

However, OPEC’s most productive and influential member, Saudi Arabia, has based its budget on an average oil price of $50 a barrel, according to PFC. The Saudi government in Riyadh also has political motives for wanting to keep oil prices in check. Saudi policymakers have routinely expressed concern about high oil prices leading to demand destruction. Oil is the primary source of energy in the developed world and the world’s leading crude producer doesn’t want that to change.

“We are concerned about the permanent destruction of demand," a senior Saudi official told BusinessWeek. "Those who buy hybrid vehicles are not going back to SUVs."

Iran and Venezuela don’t have the time, or the money, to worry about oil demand a decade from now.

“The divisions arise in OPEC because what countries need and want varies,” Gareth Lewis-Davies, an oil analyst at Dresdner Kleinwort Ltd., told Bloomberg News.. “The Saudis are playing a long-term political game. Other countries have higher costs.”

Oil accounts for 50% of Venezuela’s government revenue and 95% of the country’s export earnings. Crude exports make up 85% of the Iranian government’s revenue.

"Venezuelan fiscal profligacy and its huge off-budget populist programs have left it very little room for error," the PFC report said.

Iran and Venezuela also have political agendas. Iranian President Mahmoud Ahmadinejad and Venezuelan President Hugo Chavez both use oil as a bargaining chip and a rhetorical weapon in their venomous assaults on the United States. But Saudi Arabia, Kuwait, Qatar, and the United Arab Emirates are all on much better terms with Washington, and don’t want to alienate a new U.S. administration or jeopardize relations with their best customer.

The division within OPEC has been particularly evident over the past few months. At a June 22 meeting in the port city of Jeddah, as the price of oil skyrocketed, Saudi officials unilaterally announced a 200,000 barrel-per-day (bpd) increase in production on top of a 300,000 bpd hike issued just a few weeks earlier.

Later, as OPEC members rallied to halt oil’s price decline in September, Saudi Arabia remained hesitate to accommodate the hawkish chorus. Instead, Riyadh conceded to vague language promising a production cut, but offered private assurances to customers that it had no real intention of honoring it.

"Except for Iraq and new members who are outside the OPEC quota, the rest of the members should produce in the framework of their committed quota," Iran’s oil ministry news agency Shana quoted Algerian Oil Minister and OPEC President Chakib Khelil as saying.

Saudi Arabia produced 9.45 million barrels a day in September, according to Bloomberg estimates. Its output target is set at 8.94 million barrels.

Iran’s energy minister said earlier this week that OPEC could slash output quotas by 2.5 million barrels a day. But, again, there’s a question of whether or not Saudi Arabia will accept such a sizeable reduction.

“I don’t think we’ll see a 2 million-barrel cut, given the reaction that this will have both by the market and by politicians,” John Sfakianakis, chief economist at The Saudi British Bank in Riyadh, told Bloomberg.

Regardless of what Iran, Venezuela and others desire in the way of a production cut, the ultimate decision will rest with Saudi Arabia, which is the world leader in oil reserves, with about 260 billion barrels of oil in the ground. Iran is third with 136 billion barrels in reserves, and Venezuela is seventh with just 80 billion barrels.

Sfakianakis expects a 1 million-barrel a day production cut, Friday.

News and Related Story Links:

• PFC Energy:
  Oil Market and Countries Strategies Group

• BusinessWeek:
  Saudi Oil, OPEC’s Ire.

• Wikipedia:
  
  Hugo Chavez.

• Wikipedia:
  Chakib Khelil.

• Washington Post:
  Tough choices for Venezuela as oil prices fall

• Bloomberg:
  OPEC Risks Split on Cuts as Economies Reel, Oil Drops

• Money Morning:
  
  Saudi Arabia Hesitant to Join OPEC in Production Cut.

• Wikipedia:
  
  Mahmoud Ahmadinejad.

The Organization of Petroleum Exporting Countries today (Tuesday) signaled it would hold output steady in coming months despite the significant drop in crude oil prices that has taken place over the past nine weeks.

Members of OPEC were scheduled to meet September 9, but the final press conference, when the group formally announces its decision, won’t come until 3:00 a.m. on Sept. 10 to accommodate the observance of Ramadan. But before the meeting, several OPEC oil ministers suggested the group would maintain output despite a steep drop in oil prices.

“We have worked very hard since June’s meeting to bring prices to where they are now,” Saudi Oil Minister Ali al-Naimi told reporters in Vienna."I think everything is in balance – inventories are in a healthy position."

That sentiment was echoed by Rafael Ramirez, Venezuela’s energy and oil minister.

“Venezuela will support leaving production unchanged” at today’s meeting, Ramirez said. “Stocks are at a comfortable level and we’re seeing an overproduction of 1 million to 1.5 million barrels a day.”

Meanwhile, light, sweet crude for October delivery fell $3.45 (3.24%) yesterday to settle at $102.89 a barrel. Prices have plummeted nearly 30% since hitting a record-high $147.27 on July 11.

Fearful the price will drop below $100 a barrel, member nations Iran and Libya lobbied to reduce production ahead of the meeting.

“I hope that in OPEC’s meeting this evening the ceiling of members’ output is put back to their previous commitments to balance the world’s crude market,” said Mohammad Ali Khatibi, Iran’s OPEC governor.

Still, as the world’s largest petroleum exporter, Saudi Arabia carries far more weight than either Libya or Iran. And with Venezuela’s support there is little, if any, chance OPEC will tighten production levels.

“A production cut would not serve much of a purpose,” OPEC President Chakib Khelil said in an interview with Bloomberg Television, because it would not halt the decline in prices. “Rather, it will damage the advantage the organization has got by making a positive gesture toward consuming countries,” Khelil said.

While no member of OPEC wants an oil price correction to morph into a freefall, prices ranging from $125 to $150 a barrel threaten demand, and even threaten the global economy.

Saudi Arabia called an emergency energy summit in June, as prices approached their peak, and agreed to boost oil production by 500,000 barrels a day. At the time, many analysts dismissed the offer as a token effort to placate the United States, but the additional production, as well as a resurgent dollar, has been an important factor in lowering prices.

“The last thing OPEC wants is to see economies crater around the world,” Chip Hodge, a managing director at MFC Global Investment Management, told Bloomberg. “They want to see strong demand growth.”

The question that remains, however, is how far the price of oil has to drop before Saudi policymakers take action. Saudi sources insist they don’t have a target and are simply attempting to keep the market well supplied. But right now, $100 a barrel seems to be the point of balance.

“We need to be careful that there won’t be a price collapse but that is something that does not look probable,” said Venezuela’s Ramirez. “Looking at speculation, the dollar and other factors that have been affecting the market, maybe we are going to come to an equilibrium at around $100 a barrel, perhaps this is the level of the market.”

News and Related Story Links:

• Bloomberg:
  Oil Market Is `Well Balanced,’ Saudi’s Al-Naimi Says

• Money Morning:
  With OPEC Meeting Looming, and Emerging Markets Growing, Oil Prices May Only be Temporary

• Money Morning:
  With OPEC Planning to Cut Production, the Decline in Oil Prices May Not Last

Indonesia, the sole Asian member of the Organization of the Petroleum Exporting Countries (OPEC), will withdraw from the oil cartel at the end of this year.

Energy Minister Purnomo Yusgiantoro announced yesterday (Wednesday) that he would sign a decree officially withdrawing Indonesia from OPEC when its membership expires at the end of 2008.

A member since 1962, Indonesia’s exports have been waning for years due to aging oil wells and a lack of infrastructure investment by the government. Oil production is down 49% from its 1977 peak. The country has now become a net importer of oil, Purnomo said.

"If production comes back to give us the status of net oil exporter then we can go back to OPEC," Purnomo said, speaking before the Jakarta Foreign Correspondents Club yesterday, Bloomberg News reported.

Indonesia’s withdrawal from OPEC will help the Asian nation save an estimated $3.1 million (2 million euros) in membership fees per year, Purnomo noted.

The country has more than 4 billion barrel in proven reserves, according to the AFP. However, Indonesia’s production has been dropping steadily since 1995. So while other OPEC member nations have been benefiting from high oil prices, Indonesia has suffered as it has been forced to import oil. "If OPEC had more solidarity with its members and helped those like us who are suffering from the current high prices, it would have been a different matter," Indonesia’s Parliament energy committee chairman Agusman Effendi told the AFP. Indonesia’s daily oil output has fallen to 927,000 barrels per day (bpd) this year, down from 950,000 barrels a day in 2007. Its daily output falls short of the nation’s daily consumption of approximately 1.2 to 1.3 million barrels per day, according to Reuters UK.

The Indonesian government heavily subsidizes retail oil sales to the tune of almost $13 million per year. But due to rising costs, the government has had to enact unpopular fuel price increases, which have sparked civilian protests.

Oil’s Bubbling Higher 

Oil reached a record high of $135 per barrel on May 22, but since then the price has dropped.

Oil prices continued to be volatile yesterday. At 1:48 p.m., oil for July delivery was trading at $131.28 a barrel on the New York Mercantile Exchange. Earlier, however, crude oil traded down as low as $125.96 yesterday, according to Bloomberg data.

But the slight reprieve we’re currently experiencing is likely to reverse itself just as quickly as we head into the summer driving season and speculators continue to drive up the price of "black gold."

Both Goldman Sachs Group Inc. (GS) and JP Morgan Chase & Co. (JPM) recently released reports that have oil soaring over $200 a barrel within the next two years.

Money Morning Investment Director Keith Fitz-Gerald – one of the first investment gurus to predict triple-digit oil prices – has boosted his own target, suggesting that oil could go as high as $225 a barrel.

"The math is really simple here," Fitz-Gerald said in a recent e-mail interview from China. "We are burning through supplies at a rate that’s four times to five times faster than we’re discovering new reserves. Throw in a few [surprises]… perhaps a terrorist event… and add in the accelerating use of oil and gasoline in Third World countries, and we have the recipe for far higher prices."

News and Related Story Links:

• AFP:
  Indonesia to pull out of OPEC: minister

• Bloomberg News:
  Indonesia to Pull Out of OPEC as Oil Output Drops

• Reuters UK:
  Indonesia to quit OPEC over costly oil

• Wikipedia:
  OPEC

• Money Morning:
  Money Morning Boosts Oil Target Price to $225 a Barrel, Thanks to Continued Scarcity, Burgeoning Demand in China

• Money Morning Investment Series:
  Cashing in on Commodities: What’s Driving the Oil Bull, How Much Further It Will Go, and How Investors Can Profit

Oil scaled to a record high again yesterday (Wednesday) as the Organization of Petroleum Exporting Countries (OPEC) held output steady, despite repeated pleas from the White House to increase production.

The price of oil climbed as high as $104.56 during midday trading on the New York Mercantile Exchange after OPEC refused to break from its current output of 32 million barrels per day.

OPEC President Chakib Khelil told reporters that supplies of oil in the global market are adequate and any drastic spikes in prices were the result of speculative investing and "mismanagement of the U.S. economy."

"If the prices are high, definitely they are not due to a lack of crude. They are due to what’s happening in the U.S.," Khelil said. "There is sufficient supply. There’s plenty of oil out there."

However, Khelil also made clear his understanding of the turbulence currently facing financial markets, by pledging to maintain a "constant vigilance" over market conditions. He also indicated that an emergency meeting could be called before OPEC’s next scheduled conference in September, should conditions continue to deteriorate.

U.S. President George W. Bush was particularly disappointed in OPEC’s decision as he had issued repeated calls for the 13-nation cartel, charged with 40% of the world’s oil supply, to increase its output and drive down prices.

"Understand the consequences of high energy prices," Bush said. "I think it’s a mistake to have your biggest customers’ economies slowing down as a result of higher energy prices."

Most analysts, on the other hand, weren’t expecting any such action, as an increase in production would have further destabilized financial markets. Whereas a decrease in production would make the cartel vulnerable to any slowdown in global demand. 

"In truth, OPEC’s decision not to pump more oil is a reflection that supply is relatively good," Anthony Sabino, a professor of business at St. John’s University told the Associated Press. "It’s not so much the price of oil is going up – it’s that the value of the U.S. dollar, sad to say, is slumping."

The dollar hit a new low against the euro earlier this week, dropping 3.5%, to a value of $1.5275 per euro Monday. The dollar has dropped 16% against the euro in the past year.

News and Related Story Links:

• New York Times:
  Oil Hits $104 as OPEC Rebuffs Bush

• Wall Street Journal:
  OPEC Keeps Output Level Steady

• Money Morning:
  Commodity Prices Soar to Record Highs as Markets Grapple with Instability

Several weeks ago, gold dropped $46.80, a decline of 5.6% in a single week. That drop seems fairly large, but let’s step back to get some perspective.

It is interesting to note that in the 79 weeks since May 2006, when the yellow metal reached its high, there have now been [including the latest one] five weeks in which gold has lost 5% or more, so our recent decline is not new.

More importantly, it is reassuring to note that gold eventually overcame the four previous declines of 5% or more. In other words, the decline came after gold had already made a new 27-year high. The ability to recover from sharp, short-term corrections is a very clear indicator that gold is still in a bull market.

Likewise, silver retraced a previous-week’s breakout from the pennant consolidation pattern it had been forming since last year. Despite this setback, silver remains bullish, too.

When a correction occurs, it’s always prudent to see if anything meaningful has changed. Did any of the factors driving the precious metals higher for the past several years suddenly disappear in the past week? No, nothing has changed.

If anything, there is now another reason to own gold. OPEC has inadvertently made clear its internal disagreement about continuing to accept dollars in payment for their oil exports.

OPEC’s ‘Secret’… Revealed

On Nov. 16 – after the gold market had already closed – Bloomberg News, Reuters and Yahoo! News all reported the discussions of an OPEC meeting that the ministers had intended to be held behind closed doors. Instead, it was accidentally broadcast on closed-circuit television to reporters in the media room.

According to Bloomberg, "Saudi Arabia, the world’s largest crude oil exporter, rejected a proposal by Iran and Venezuela to discuss the weak dollar at this weekend’s OPEC summit in Riyadh, saying it didn’t want the U.S. currency to ‘collapse.’"

A Reuters article published by The Guardian in the United Kingdom quotes Prince Saud al-Faisal, Saudi Arabia’s foreign minister as follows: "My fear is that any mention that OPEC makes of studying the issue of the dollar, will in itself have an impact… Just indicating that we have charged finance ministers with studying this issue… would mean a decision taken by OPEC would have the opposite effect and the media would pick up on this point… And then perhaps we would find that the dollar had collapsed, instead of us having done something in the interest of our countries."

Yahoo reproduced an AFP news report, stating that "Iran’s Foreign Minister Manouchehr Mottaki said in a written proposal that a final declaration by OPEC leaders, who arrive here Saturday for a two-day summit, should express concern by member states over the fall of the U.S.dollar. Reacting to the request… Prince Saud… warned that mentioning the falling dollar could lead to the ‘collapse’ of the U.S. currency… Member states should express concern over ‘the continued depreciation of the U.S. dollar’ in the final declaration."

The report on Yahoo! went on to quote Prince Saud as saying: "This is a sensitive issue. It will cause the dollar to drop further, thus complicating the problems we are facing from the dollar’s fall." After 30 minutes, someone became aware of the gaffe, and an OPEC official turned off the closed-circuit TV feed.

Nevertheless, we learned enough. We already know about central banks and savvy investors diversifying out of dollars, and we now know that OPEC is talking about it, too.

Stabalizing Oil’s Rocketing Price

If it wants a stable oil price, which is its stated aim, then OPEC should be pricing oil in terms of gold. When viewed in terms of gold, the price of oil has barely changed.

With other Gulf Cooperation Council countries now reviewing their currency pegs to the dollar, as Kuwait has done, they should be thinking about defining their currencies as a weight of gold rather than some basket of constantly inflating fiat national currencies. Linking to gold would bring a level of price stability to the region not available from linking to any basket of currencies.

Oil was effectively priced in terms of gold until 1971, when the dollar was still on the gold standard.

Will OPEC abandon the dollar and once again price its crude oil in terms of gold? Ministers have given clear reasons [and desires] for doing so, which is another good reason why we should own gold. [For some specific profit plays with gold, check out our recent Money Morning Investment Research Report, "The Five Top Plays to Profit From the Gold Boom." To access the report, ,please click here. Like our other reports, this one is free of charge.]

News and Related Story Links:

• Bloomberg News:
  Saudi Arabia Won’t Include U.S. Dollar in OPEC Talks.

• Yahoo! News:
  OPEC blunder reveals Saudi-Iran disagreement on dollar.

• Money Morning:
  Eight "Juniors" to Play for Major Profits in the Gold and Silver Sectors.

• Money Morning:
  Three Pathways to Global Profits Despite Our "Worthless Pieces of (Green) Paper".

• Money Morning:
  ‘Axis of Unity’ Provides Dollar Dissent at OPEC Summit.

• Money Morning:
  Oil Prices Slide on Demand and OPEC Considerations.

• Money Morning:
  Three Ways to Profit From High Gasoline Prices.

• Wikipedia:
  The Gold Standard.

• Money Morning Investment Research Report:
  The Five Top Plays to Profit From the Gold Boom.

Last Sunday, Iranian President Mahmoud Ahmadinejad dropped a bombshell in Riyadh. And while it wasn’t a nuclear one, it might as well have been.

He stated on the record at a rare gathering of the heads of the Oil Producing and Exporting Countries (OPEC) cartel that OPEC members have expressed a real interest in converting their cash reserves from the beleaguered U.S. greenback to the European euro. More specifically, Ahmadinejad referred to the U.S. dollar as "a worthless piece of paper."

Not surprisingly, Ahmadinejad ally and fellow anti-U.S. hardliner Hugo Chavez – the president of Venezuela – echoed a similar sentiment.

Given that the two of them are like Frick and Frack when it comes to anti-U.S. rhetoric, this was hardly unexpected.

What makes their posturing so troublesome, however, is that for the first time there was no rebuttal, or reassuring commentary from Saudi Arabia and other key U.S. petrodollar supporters, in response.

In fact, they didn’t even mention concerns about the falling U.S. dollar in the summit’s final declaration.

Instead, OPEC members formed a working group to study the dollar’s effect on oil prices and to "investigate the possibility of a currency basket" as a means of offsetting declining dollar-based reserves. At the same time, Ahmadinejad and Chavez agreed to set up a joint Iranian-Venezuelan bank and concurrently signed deals to boost cooperation in the oil, petrochemical and general industrial sectors, according to Iranian media.

The timetable for recommendations and action, like many things from OPEC, remains unclear. But the mere fact that they’ve gone so far as to set up a working group to study the currency problem, and that at least two major member states are busy establishing bilateral financial institutions, suggests that changes are in the wind and this time those changes are for real.

Let me emphasize this point: This is not good. In fact, under the circumstances, I can’t think of anything else short of a direct terrorist attack that poses as serious a challenge to our economic future and to any of our investments that aren’t positioned for this possibility.

That said, if you know that something is going to happen, there are almost always profitable plays you can make.

Let’s talk challenges first.

The Fallout From a Falling Dollar

First, OPEC members have long grumbled about the falling dollar and taking payment in euros. This is nothing new. In fact, China already pays for Iranian oil in euros, so Ahmadinejad’s desire to get away from the dollar is hardly unexpected given how much he already banks on the deal. Neither is the fact that both Venezuela and Russia have joined the "euros-for-oil" party, as have Libya, Indonesia and Malaysia, I believe.

But what represents a stark change from past posturing is that this time there was no reassuring voice from countries like Saudi Arabia and Jordan, who have traditionally been our allies in keeping the petrodollar relationship intact since the early 1970s.

This time around, both our "allies" were completely silent on the matter and their silence, as the old adage goes, speaks volumes about how much internal pressure is mounting against such dollar-favorable OPEC members. I’ve met many of the their representatives over the years, and let me assure you that they are very concerned that the oil-for-euros crowd will win.

The reason is that many OPEC countries peg their own currencies to the dollar. By pricing crude the same way in dollars, they have their own form of economic benchmark. Should that change in response to a shift away from dollars, each producer would not only have to endure their own economic reset, but they would potentially also have to begin pricing oil on the free market, which is something OPEC cartel members have gone to great lengths to avoid for nearly 30 years. This could result in dramatically higher oil prices as the bigger players squeeze the smaller producers out and the dollar falls even further in response.

How high will crude oil soar? My calculations suggest $197.30 a barrel is possible – not probable – but possible.

[There was talk out of the Middle East this weekend of OPEC boosting output, prompting predictions that oil would fall to as low as $70 a barrel. Even if OPEC boosts production and prices fall that much, I'm telling you right now that any price decline will be temporary, and that oil prices will subsequently resume their upward advance. There's just too much global demand for the "black gold" right now.]

And that brings me to my second point. A run-up in the price of crude oil to nearly $200 a barrel would imply a dollar falling another 25% from present levels. Even though we’ve written about it extensively here at Money Morning and I’ve personally addressed the issue for years at financial conferences, many people still don’t connect higher oil prices with the falling dollar, but they should.

Therefore, the pinch we feel in our wallet is as much the result of U.S. Federal Reserve Chairman Ben Bernanke’s seemingly incomprehensible "attention-to-deficits disorder" as it is to any Middle Eastern machinations.

Whether OPEC members make good on their threats to abandon the dollar completely – or simply shift to a currency basket – is a moot point. The real issue is that OPEC members and other oil producers have had to boost the price per barrel to offset both the corresponding loss in immediate cash payments they receive and the decline in value of the dollar-based reserves they maintain.

And OPEC members will have to continue to do so. This can only put additional downward pressure on the greenback, especially if Team Bernanke lowers interest rates again as is so commonly hoped.

Third, any shift away from dollars into other currencies will effectively imbue the U.S. dollar with an added element of exchange-rate risk when it comes to oil – which is seemingly what the anti-US OPEC members want.

If that doesn’t make sense, think of it this way: Should that change and U.S. dollars str no longer required for oil purchases, the demand for dollars would plunge, sending the greenback into a freefall.

In other words, the global demand for dollars would fall dramatically because there would be only disadvantages to maintaining it as a reserve if OPEC no longer prices oil in dollars.

I don’t know about you, but this is enough to make my head spin and I do this for a living!

So let’s shift away from this gloom and doom and look, instead, at the profit opportunities this unceremonious dumping of the dollar would create. After all, making money is the reason we’re here in the first place.

Capitalizing on the Dollar’s Denouncement

One thing is certain in all this: There’s no way that Ahmadinejad and Chavez intended to create profit opportunities for U.S. investors. But in making the greenback an OPEC outcast, that’s precisely what they’ll be doing. Let’s look at some of the best opportunities that I see before us.

Indeed, if OPEC makes good on this subtle threat, make sure to:

• Grab the Global Titans: Global titans derive a big portion of their sales from outside U.S. borders, and in currencies other than the greenback. Own a few winners here and you’ll suddenly find that you’re literally cheering every time the dollar clicks downward; you’ll be making it up with investments that are booming even as our own markets are tanking. Examples include YUM! Brands Inc. (YUM), PepsiCo Inc. (PEP), Boeing Co. (BA), Deutsche Telekom AG (DT), and ABB LTD (ABB).

• Plug Into Alternative Energy: Big Energy is really expensive right now, but those high oil and gas prices will literally fuel the race to find the eventual winning sources of alternative energy. Unless you really know your stuff, however, it’s tough for you to pick the winners. This is one of those cases where it’s smart to let the experts make those choices – and to use a fund, with multiple investments, to diversify away the substantial risks. That’s why an exchange-traded fund (ETF) like the PowerShares WilderHill Clean Energy ETF (PBW) is such a great choice. The continued escalation of energy prices will force the transition to alternatives – far more effectively than any legislative conservation measures ever would.

Clean Up on Currencies: Because the dollar forms the backbone of the major currency-trading relationships within the G10, it makes sense to capitalize on potential currency disruptions down the road. The Powershares DB G10 Currency Harvest Fund (DBV) plays that role perfectly. It simultaneously invests in the weakest and the strongest of the G10 currencies and could add a nice kicker as currencies realign themselves in response to a dollar-disadvantaged world. And in this kind of weak-dollar environment, foreign bonds clearly are an attractive investment for U.S. investors. But there aren’t any ETFs specializing in foreign-currency bonds. A good alternative would be a high-quality international bond fund: The no-load T. Rowe Price International Bond Fund (RPIBX), which invests in high-quality, non-dollar-denominated bonds, is a sound choice.

The Dollar: Down, But Never Out

One final thought. It’s important to retain perspective. The great investors always do. In terms of the topic at hand, that perspective involves the greenback. Even though the dollar seems to be in dire straights at the moment – on the ropes and sagging like a once-great fighter waiting for the referee to end his bout as a TKO for his up-and-coming rival – comebacks are always possible.

Indeed, I can almost guarantee you that there will come a time when U.S. dollar will clamber its way back to the top of the heap, and declare itself once again "King of the Hill."

With this bit of advance wisdom, don’t completely abandon your current investment strategies in favor of some of the things we’ve mentioned here today.

As Mick Jagger says: "Time is on my side … yes it is…"

News and Related Story Links:

• Money Morning Investment Analysis:
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• Money Morning News:
  ‘Axis of Unity’ Provides Dollar Dissent at OPEC Summit.

• Wikipedia:
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• Money Morning Investment Research Report:
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• Wikipedia:
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• Wikipedia:
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• Money Morning Special Investment Report:
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