Saudi official says U.S. dollar peg will remain

By Michael Peltier

TALLAHASSEE, Fla., Feb 11 (Reuters) - Saudi Arabia's currency and oil price will remain tied to the U.S. dollar despite its current weak valuation, Saudi Minister of State Abdullah Alireza said on Monday.

But speaking at a global cooperation conference at Florida State University in Tallahassee, Alireza said relations between the two countries continue to fray in what he called a "drifting apart" that has occurred between the long-time allies since the Sept. 11, 2001 attacks and the invasion of Iraq.

Saudi Arabia, the world's biggest oil exporter, pegs its riyal to the U.S. dollar. But surging inflation has intensified debate about dollar pegs throughout the Gulf region.

With $400 billion to $500 billion tied up in the U.S. currency, uncoupling the currencies would be like Saudi Arabia shooting itself in the foot, Alireza said.

"The dollar is our currency of choice," he said. "We have no reason to believe that currency reevaluation would be a panacea."

While tied together monetarily, Alireza said tensions between the two counties that began after 9/11 were exacerbated when the United States, over Saudi objections, invaded Iraq.

After decades of mutual cooperation and support, the "jingoistic" invasion and subsequent occupation plunged the region into chaos, tarnished U.S. credibility among Saudis and Arab countries and made the potential of a democratic Iraq less likely.

"We have an obligation to tell our friend what we feel about parts of America that became drunk on muscular power," Alireza said. "You have abdicated the single most important strength that the United States has and that is soft power, the moral authority to persuade people to do what you want."

Further, he said, U.S. actions that ousted the Taliban in Afghanistan and conquered Iraq have embolden Iran.

"Iran is now the recipient of two gifts," Alireza said.

The minister said his country would continue to hold oil production at current levels despite the high price. He said the global problem is not with crude oil supply, but the lack of refining capacity.

Refining capability has been diminished by instability in the region, another negative outcome of U.S. involvement in Iraq, he said.

"The risk factor in the Middle East has not gone away," Alireza said. "So my answer is the same: the United States and the world is awash with oil. This is not a supply side issue." (Editing by Jim Loney/Andre Grenon)