To say that Saudi Arabia has been the lynchpin to U.S. foreign policy objectives in the Middle East and central Asia is to engage in massive understatement. For more than fifty years the Saudis have helped prop up U.S. foreign policy by exporting their oil to the world and taking only dollars in return.
Their currency, the Riyal, has been pegged to the U.S. dollar since then Secretary of State under President Nixon, Henry Kissinger, brokered that deal that built the so-called petrodollar system.
Now, in the intervening decades the petrodollar has been a buzzword thrown around by many, including myself, to explain the architecture of the U.S.’s imperial ambitions. In many ways, it has served a crucial part of that, at times. But, it was most needed during the early years of the dollar reserve standard, helping to legitimize this new currency regime and provide a market for U.S. debt around the world to replace gold.
After that it was just one aspect of a much bigger game built on the ever-expanding Ponzi scheme of fake funny money. In reality, the eurodollar shadow banking system is just a lot bigger than the petrodollar.
That said, I don’t discount it completely, as I understand this is real money changing hands for real goods, rather than the vast quantities of dollars out there supporting an increasingly creaky financialized system. Real trade matters and what currency that trade occurs in, also matters.
The U.S. closely defended the petrodollar famously going to war with any country that dared to offer oil on international markets in any currency other than the dollar, c.f. Iraq under Saddam Hussein. But, times change and so do the structure of capital markets.
So, when evaluating the health of the petrodollar system and its importance today it’s important to realize that the oil market is far more fragmented in payment terms than its been since the early 1970’s.
As a system, the petrodollar was always going to die a death of a thousand cuts. To my reckoning the first inklings of this began in late 2012 after President Obama finally used the financial nuclear weapon, expulsion from the SWIFT payment system, on Iran for pretty much no reason.
Earlier this year I wrote a piece describing why in negotiations you never go nuclear and how Obama made the biggest strategic blunder, possibly in U.S. history, by first threatening the Swiss over bank secrecy and then Iran.
The fact that the Obama administration politicized SWIFT when it did ended an era of international finance. The world financial system ended any illusions it had over who was in charge and who dictated what terms.
The problem with that is once you go there, there’s no going back, which was {Jim} Sinclair’s point over a decade ago.
Threatening Switzerland with SWIFT expulsion wasn’t a sign of strength, however, it was a sign of weakness. Only weak people bully their friends into submission. It showed that the U.S. had no leverage over than the Swiss other than SWIFT, a clear sign of desperation.
And that’s what the U.S. did when it pushed the big red ‘history eraser’ button.
The Swiss knuckled under. Its vaunted banking privacy is now a part of history.
Iran, however, in 2012, facing a similar threat from Obama, didn’t knuckle under and forced Obama to make good on his threat. Once you uncork the nuclear weapon you can’t threaten with lesser weapons, they have no sway. This is a lesson Donald Trump would learn the hard way since 2018.
Iran bucked the petrodollar to sell its oil by making a goods-for-oil swap arrangement with India. Iran was laughed at by U.S. foreign policy wonks at the time. Then we found out that Turkey was laundering oil sales for Iran through its banks using gold.
Its currency, the Rial, since then has been under constant attack by the U.S., most viciously under President Trump who sought to do what Obama couldn’t do, drive Iran’s oil exports to zero. The goal was regime change.
I chronicled this in detail, over these past four years, saying explicitly that the strategy was stupid and short-sighted. It didn’t work. It couldn’t work.
Iran’s resistance to Trump’s bullying only further entrenched the existing power structures there and hardened the Iranian people to become more disagreeable, more disdainful of America and, likely, Americans.
All it did was force Iran to develop alternate plans and find new markets. Those alternatives meant courting better relations with China, Russia and Turkey, which the U.S. tried hard to sabotage. As long as Iran was as good as its word, supplying oil and acting as a reliable partner in diplomacy, eventually deals would come to them.
Last year’s $400 billion, 20-year investment from China is the culmination of that resistance and ingenuity. That’s the whirlwind wrought by Trump’s pro-Israel, anti-Iran and confused Syria/Afghanistan policies.
In the intervening years, the U.S. sanctioned Russia who sells their oil, a lot of it, in a number of different currencies, some of which are still dollars. China began a yuan-denominated oil futures contract a few years ago, which is ultimately convertible to gold in Shanghai.
The U.S. still trades with China and Russia and yet no one who called for the death of the petrodollar then was right. These things are a process, not a step-function. The point being that the petrodollar isn’t dependent on it being a monopsony in oil trading. The system has been leaking for nearly a decade now.
Iran is an example of why Davos will fail to pull off anything more than the most limited form of their Great Reset. So is Russia. Necessity is the mother of innovation. Putin makes this point all the time. And he, like the Mullahs in Iran, were laughed at by the U.S. foreign policy wonks on K Street.
But, this article isn’t about Iran or Russia or China. It’s about Saudi Arabia.
Now that Afghanistan is all but settled in the geopolitical sense now the question is all about the fallout from it. For years we’ve seen the coalition that intended to atomize Syria splinter, bit by bit. First it was Qatar, who defied Saudi Crown Prince Mohammed bin Salman (MbS), who was isolated just like Iran. Qatar survived.
Then it was Turkey, constantly flipping and flopping around under President Erdogan trying to fill the power voids left as Russia’s military successes in Syria and diplomatic successes around the region frustrated U.S., NATO and Israeli plans there.
Slowly, bit by bit, Russia and China moved into those spaces while Erdogan tried and failed…. over and over and over again.
So, with the U.S.’s presence in Afghanistan now, officially, part of history, big changes are coming to the entire region fast and furious.
And the biggest one was the vague but significant defense coordination deal between Russia and Saudi Arabia. Because now, after having wormed its way into control over the marginal barrel of oil produced globally Russia controls OPEC+. It’s a nominal power-sharing agreement with the Saudis, but ultimately, with Trump out of the picture, the Saudis realized they have very few, if any, friends left in the world.
I went on this history lesson to remind you that this moment didn’t just happen. It was built over a decade of U.S. foreign policy mistakes. Mistakes that tried to extend the benefits and the narrative of the petrodollar for far longer than it should have.
The system should have died years ago. But it’s limped along indulging MbS’s bloodlust in Yemen, Syria and Lebanon. Rather than subsidizing U.S. foreign policy goals, it subsidized the Saudi Royal family’s continued delusion that it was a global power broker.
That continued until Trump was overthrown and Biden was installed. Since then MbS and the rest of the House of Saud understood what their future looked like and in whose hands it was.
Russia’s.
We’ve seen negotiations behind the scenes between Riyadh and Tehran, between Riyadh and Damascus. Syria is coming back into the Arab League. Iran and the Saudis are winding down the disastrous conflict in Yemen.
The time to sue for peace was at hand and to find a way forward that ensured relative stability. So, how does the petrodollar fit into this?
For now it doesn’t. Those thinking that the petrodollar is dead because of this deal are getting way ahead of themselves. With oil prices in the $70’s (Brent crude) there is no immediate threat to the future of the Saudi government. They can handle a mild budget deficit at these prices for a long time. There is no pressure on the Riyal peg at these prices.
What they cannot handle is oil in the $30’s or $40’s for any length of time. That is what blows out the budget deficit.
So, for now, as long as the U.S. doesn’t further antagonize MbS there is no reason why what’s left of the petrodollar can’t remain in place.
to that end, that bane of Davos’ existence, Southfront.org whose distribution is heavily censored by Big Tech, is speculating that the U.S. could sanction Saudi Arabia for this agreement with Russia.
The United States is urging its allies to avoid major defense deals with Russia, a State Department spokesman said, commenting on the signing of a military cooperation agreement between Russia and Saudi Arabia.
“We continue to urge all our partners and allies to avoid major new deals with the Russian defense sector, which we have made clear with … the Countering America’s Adversaries Through Sanctions Act (CAATSA),” the spokesman told Russian state outlet RIA.
While this is speculation, it is on target however, because this statement from the State Dept. came before the Saudis sat down and signed an agreement with the Russians during the height of the U.S.’s shameful and shambolic retreat from Kabul.
As insults go in geopolitics, this was a pretty big one.
So, that will be the next shoe to drop here. If I’m right and the goal of those behind the Biden Administration (itself with a use-by date similar to that of the petrodollar) is to dismantle the U.S. as much as possible, then we will see Lindsey Graham and others wring their blood-soaked hands in grief lamenting the necessity of sanctioning our long-term friends in Saudi Arabia.
It will be as nauseating as it is predictable.
And that will be a willful act of destruction of a still-significant portion of foreign demand for the U.S. dollar. This, of course, plays directly into the hands of Davos who are actively undermining confidence in the U.S. politically, economically, culturally and socially. Because the minute the U.S. does this MbS’s only rational move is to break the Riyal’s peg to the dollar and allow it to float freely.
At $70 per barrel the effect on the Riyal will be minimal.
That said, it would allow for a sharp drop in oil prices internationally as the Saudis, who have needed a strong oil price to fund its domestic welfare state, will no longer need as many dollars for its oil to do that. So, expect Davos to try to help this along. Well, they already tried when the UAE tried to torpedo OPEC+’s solidarity a few weeks back.
If oil were to drop sharply, say into the $40’s, it would create massive inflation in Saudi Arabia due to a sharp drop in the now-exposed-to-market-forces Riyal. And the Saudis would then have to go through the same painful adjustment that Russia went through in 2015-17, when it finally ended its strong ruble policy.
This is why Biden is told to beg publicly for lower oil prices. It has nothing to do with helping American consumers and has everything to do with baiting out the Arab countries to de-peg their currencies from the petrodollar and hope to crash oil prices in the confusion.
So, cue the Mu variant of COVID-9/11.
The Saudis, however, for their part have learned the lessons well what happens when you get into a price war with Russia. You lose. So, instead of fighting Russia for market share, they’ve decided to coordinate production for the big win-win for everyone while the U.S. continues to grapple with the reality that its empire is not only crumbling, but being actively dismantled from within.
And given where we’re headed, I’d say that the ones laughing now aren’t at the State Department.
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But of course those wanting a divorce from the Saudis really want the electrification of all transportation. That is the end game, right?
Sheryl, that’s unlikely to happen. The current US energy infrastructure simply can not support anything like that amount of production, distribution and consumption. The hysteria over “Climate Change” at its most fundamental, is about lowering living standards, decreasing mobility and centralizing the population into mega hives. The better to control them. That is what they mean when they parrot the phrase; “Build Back Better”. Better for whom? Only for those who Rule.
Agreed,except that the ruling class is all being driven around in heavy armored vehicles with V8 engines (or bigger). Its not just John Kerry who flies around on private jets.
The Paris accord was signed by politicians who arrived on big jet fuel powered aircraft, before transferring into armored limos requiring truck engines. They were escorted to the conference by hundreds and hundreds of gasoline powered support vehicles.
Those are the lying politicians who signed the Paris accord. Most of the world wasn’t even invited — most of the energy demand in the world wasn’t invited.
Amazon just built out a huge fleet of gasoline powered delivery vehicles. Uber underpays their drivers, who use gasoline powered vehicles. the FANGMA companies all run their data centers off conventional power, even if they have a token alternative energy source for PR purposes.
If Amazon or Google or Faceplant or whatever social justice warriors think electric vehicles are coming by 2030 as Dementia president claims (or Canada’s hair piece or anyone in the EU)… they aren’t putting their own money where their mouth is.
They won’t even invest in a functioning electrical grid for California, their home state.
At some point the US will need to face a re-alignment and change, much as the USSR did in the 90’s. The question is not if, but when and will it be controlled or free fall. My money is on a controlled demolition, with Russia watching quietly on the rubble of what use to be the EU. Russia will definitely want the EU to implode before the US. Although they aren’t quite positioned or prepared yet for it to happen.
Tom, great read as always. Bottom line: The U.S. will only weaponize the oil price—and the dollar—one more time; it will be the last time.
> Then we found out that Turkey was laundering oil sales
> for Iran through its banks using gold.
> Its currency, the Rial, since then has been under
> constant attack by the U.S.
Minor correction: There’s no Turkish Rial, it’s the Lira.
@MGS 12:23am: I believe the Russian government is working overtime to achieve global Top 5 by GDP-PPP by 2025, as set out earlier by Putin; Germany does what it can to help that happen, only the majority of German voters can’t see that yet, blinded by the same misguided and misguiding “elites” working to bring down the U.S. from within.
Constant use of conservative/understating statistics by Rosstat work both as disinfo to the overpaid western MICCIMAC clowns and—more importantly—as motivational boost at home, like again this year when growth expectations were surpassed by reality. It’s a full 180 of what happened in the USSR. Never mind Russia’s vast untaxed domestic shadow economy enjoying huge freedoms at close-to-zero repression.
Main problems in Russia which haven’t changed a lot in the last 3 years:
– curb costs of living (RUB-denominated),
– raise main street incomes (RUB-denominated),
– eliminate bribery/corruption at low and medium levels,
– improve public services including health care,
– further boost RUB trade with neighbors,
– reduce reliance on EU imports (more to be done),
– reduce reliance on raw petro exports (way to go).
Some numbers for first half 2021:
67.4B euro exports RU➡EU (+35.6% vs. first half 2020)
42.7B euro exports EU➡RU (+13%)
Source: tass.com/economy/1325689 (Aug. 13, 2021)
Needless to say, Gazprom will enjoy pumping gas with or without 100% utilization of Nord Stream 2 to a very needing western EU. Expect a cold winter in as many ways as possible.
Its in the previous sentense refers to Iran not Turkey…I know the Turkey is the Lira.
Otherwise, brilliant comment… thanks for the additions.
Tom, great read as always. Bottom line: The U.S. will only weaponize the oil price—and the dollar—one more time; it will be the last time.
> Then we found out that Turkey was laundering oil sales
> for Iran through its banks using gold.
> Its currency, the Rial, since then has been under
> constant attack by the U.S.
Minor correction: There’s no Turkish Rial, it’s the Lira.
@MGS 12:23am: I believe the Russian government is working overtime to achieve global Top 5 by GDP-PPP by 2025, as set out earlier by Putin; Germany does what it can to help that happen, only the majority of German voters can’t see that yet, blinded by the same misguided and misguiding “elites” working to bring down the U.S. from within.
Constant use of conservative/understating statistics by Rosstat work both as disinfo to the overpaid western MICCIMAC clowns and—more importantly—as motivational boost at home, like again this year when growth expectations were surpassed by reality. It’s a full 180 of what happened in the USSR. Never mind Russia’s vast untaxed domestic shadow economy enjoying huge freedoms at close-to-zero repression.
Main problems in Russia which haven’t changed a lot in the last 3 years:
– curb costs of living (RUB-denominated),
– raise main street incomes (RUB-denominated),
– eliminate bribery/corruption at low and medium levels,
– improve public services including health care,
– further boost RUB trade with neighbors,
– reduce reliance on EU imports (more to be done),
– reduce reliance on raw petro exports (way to go).
Some numbers for first half 2021:
67.4B euro exports RU⭢EU (+35.6% vs. first half 2020)
42.7B euro exports EU⭢RU (+13%)
Source: tass.com/economy/1325689 (Aug. 13, 2021)
Needless to say, Gazprom will enjoy pumping gas with or without 100% utilization of Nord Stream 2 to a very needing western EU. Expect a cold winter in as many ways as possible.
This column brings back lots of memories. I remember the Swiss-IRS kerfuffle and thought there would be more to it than that… but all it seemed to do was generate a few billion dollars (petty cash) for the IRS and discomfit the US expat community that got ensnared in all of the bureaucratic reporting requirements. I never determined if the initiative was for domestic consumption, to give the Obama administration a veneer of being against the wealthy after it bailed out Wall Street post-2008? I was also thinking it was designed to weaken and force Switzerland into EU membership? Yet it left all of the City of London entities unscathed. And then Hillary Clinton stepped in as SoS and settled the UBS-IRS dispute… while coincidentally generating significant donations to the Clinton Foundation (as usual).
It is all still a mystery to me as to why it was done… but thanks for the reminder.
——–
Just a clarification, when you say, “eurodollar shadow banking system”, are you referring to this?
The Spider’s Web Britains Second Empire
https://youtu.be/-zT9pa5AOuE
The City of London and it’s international entities?
I seem to recall and article that scheme was to construct the US as the go to banking system, like Switzerland and introduce laws that would allow a certain amount of secrecy, the state chosen was Nevada. How far this progressed I’m not aware. It did get Switzerland to buckle, but I think only because the EU wanted it as well, it may have been a move against Russia as well. Once that worked with SWIFT, it became a too common a threat and easy to use.
And where does US shale fit into this picture?
Like the loss-making tech behemoths that hand over all our data, a heatsink for dollars?
U.S. shale is being downgraded by Davos to make U.S. energy costs skyrocket vs. that of Europe’s. Trump tried to reverse this.
Do you think that the US failure to install puppets in Ukraine or Syria to help the Saudis pivot to LNG is a factor in this relational breakdown, or is that a red herring?
A bit of a red herring. I really do think it’s simply admission of reality on their part and a resumption of the Obama policy of being less pro-Israel.
Shale has to start competing on a fair basis with Alberta tar sands oil and Venezuelan offshore. Alberta is getting steadily cheaper and there’s a lot of it. There’s even more Orinoco Belt Ven. oil.
Even if there’s a lot of shale product left, it’s eventually going to get less profitable to drive out of the ground.
Spot on.
After agiven shale asset has been flushed theough bankruptcy three or for times, it then becomes profitable at lower prices, but nowhere near Russia’s B/E of circa $25 or KSA’s of circa $12.
Your source for how this is going to play out is way off the mark. I have 40+ years of international oil experience including 13+ with the Saudis. The US dollar will be the big loser here as the Saudis and maybe even OPEC start selling oil in multi-curencies. The Fed already knows it and has been buying Saudi held US Treasuries at over a $ 1 trillion per day in the reserve repo market. Big policy error by Biden, but then again there are no policy errors – intentional collapse of US economy by the socialists. This is the Arab oil embargo on steriods if this plays out the way I think it will.
And sure enough, today Biden announced they will be declassifying 9/11 docs, which most likely will paint the Saudi’s in a very ugly light.
A well written, and considered analysis of of the real politic that creates the “reality”
we see, hear, and read in the mainstream.
Perfect timing Tom…
https://www.politico.com/news/2021/09/03/9-11-documents-declassification-509468
Yeah. I’m not surprised by this at all
A few decades ago, the USA was the largest consumer of oil in the world. The saudis are the largest suppliers of oil in the world. It pays to take care of your top customer. The saudis became America’s best friend.
Then US manufacturing moved to China, which meant the energy demand associated with manufacturing went to China. China became the largest importer of oil in the world. The saudis started kissing up to China.
It’s not Davos. It’s not personal. It’s business.
Biden was an idiot before he got dementia. Acting like Saudi Arabia’s jilted lover is stupid, it was always about business. If someone smarter than Biden brings energy demand (oil demand) back to the USA, Saudi Arabia will be here kissing @ss again. Nothing personal, it’s just business.
Biden will eat more ice cream. However, the Obama foreign policy team that misused SWIFT and bullied Swiss banks (a one time, scorched earth action as tom explained) is now talking about abusing the US legal system to extort money from the saudis. This will damage international faith in US financial markets, because there is nothing else the ambulance chasers can seize.
In the end, the saudis will sell oil to Asia because the US government taxed US manufacturing to death, and China welcomed it.
But in the end, the spendthrift US government needs to attract foreign capital to fund its debt binging. The Biden attack on saudis will only undermine faith in US capital markets, and thus the USDollar safe haven status.
No amount of US legal system corruption will negate 9/11, nor will it deter future terrorists who hate both the Saudi government and the US government. If anything, driving a wedge between two corrupt governments will actually encourage terrorists.
The US governments ability to fund its perpetual deficits will be damaged by Biden’s stupidity. The manufacturing sector (and energy use) is not effected. America’s love of pickup trucks is not effected — well continued road neglect may cause a few drivers to switch from vulnerable small cars to bigger pickups that can handle pot holes and flooding. Attacking the Saudis — really attacking US deficit spending— will discourage electric vehicles that depend on government sponsored electric grids.
It’s just yet another snafu by the morons on Obama’s foreign policy team.
And this is foreign policy or business?
https://finance.yahoo.com/news/saudi-arabia-lowers-light-crude-122129217.html
Its yahoo finance… left wing bullsh!t that needs constant subsidies to continue publishing at all.
People trying to understand world events are better served looking at incentives, and ignoring the propaganda from childish media personalities.
If yahoo knew the first thing about business, why can’t they make a profit? Or at least break even? If they can’t even run their own business, why would anyone trust their analysis of other businesses?
Asking yahoo or any member of “the press” about capitalism is like asking Denise Richards to explain nuclear physics, or asking the Kardashian sisters to explain hard work.
I don’t understand why the Arabs woud like to lower the prices ?
“This is why Biden is told to beg publicly for lower oil prices. It has nothing to do with helping American consumers and has everything to do with baiting out the Arab countries to de-peg their currencies from the petrodollar and hope to crash oil prices in the confusion.”
Market Share
Thank you
The Saudi Kingdom began the process of loosening their ties with the American Republic when the old King and his entourage visited Russia for four days in 2017, an unprecedented trip, the old man did the thinking, a smart move, he figured the writing was on he wall then that the days of the American hegemony was coming to an end, the latest deal on weaponry is but another step in the same process that will continue aligning the Kingdom with Russia, also China.
Baron, Excellent reminder of geopolitics.Turning point. More info here….
https://carnegieendowment.org/2019/10/24/brief-guide-to-russia-s-return-to-middle-east-pub-80134