By Ghassan Kadi for the Saker Blog
The Russian special operation in Ukraine has created the potential for an avalanche of geopolitical and geo-economic changes. Some of them were bound to happen; just waiting for a trigger factor.
Is the end of the Petrodollar one of them?
To understand the importance of the Petrodollar, we need to go back to its origin and definition.
Many articles and definitions have been given over the years to explain what the Petrodollar is all about; but none in my opinion comes close to the one explained by Mamdouh Salameh. Back in 2015, he predicted that the Petrodollar might have outlived its use-by date. His prediction is perhaps now outdated, but that aside, an extract of the abstract of his article outlines the definition and the importance of the Petrodollar for the US economy
‘The Petrodollar came into existence in 1973 in the wake of the collapse of the international gold standard which was created in the aftermath of WWII under the Britton Woods agreements. These agreements also established the US Dollar as the reserve currency of the world. The Nixon Administration understood that the collapse of the gold standard system would cause a decline in the global demand for the US Dollar. Maintaining demand for the US Dollar was vital for the United States’ economy. So, the United States under Nixon struck a deal in 1973 with Saudi Arabia.
Under the terms of the deal, the Saudis would agree to price all of their oil exports in US Dollar exclusively and be open to invest their surplus oil proceeds in US debt securities. In return, the United States offered weapons and protection of Saudi oil fields from neighboring countries including Israel. For the Americans, the Petrodollar increases demand for the US dollar and also for US debt securities and allows the US to buy oil with a currency it can print at will. In 1975, all of the OPEC nations agreed to follow suit. Maintaining the Petrodollar is America’s primary goal’.
Do you get the picture?
The Petrodollar was meant to be a win-win agreement in which America propped up its economy, and in return supplied Saudi Arabia with security.
As time went by, the deal became increasingly one-sided, one in which Saudi Arabia was getting the spiky end of the pineapple. The Saudis have been feeling shafted for a long time, but they did not have enough intestinal fortitude to stand up and show their dismay to Uncle Sam.
When America asked old-school Saudi royals to jump, they asked how high. Love him or hate him, young Saudi Crown Prince Muhamed Bin Salman (MBS) is different.
Over the last few years, I have written many scathing articles about MBS’s character, ambitions, thirst for power, sneaky behind-the-scenes deals with Israel, but the biggest black mark against him will always be his war on Yemen. I will not suddenly make a 180 degree turn and start praising him. But credit must be given when credit is due.
MBS happened to rise to power on the eve of Saudi Arabia’s failure in Syria. For fairness, this was not a war he started.
When he took control, Saudi Arabia had already lost its war in Syria, its biggest ally in Lebanon (Hariri) proved to be a wimp and a hopeless ally despite all the support and bottomless funds he received in order to put Hezbollah under control. In Yemen, the Houthis had already taken control of the capital Sanaa. Iran was moving in on Saudi Arabia on 3 fronts; or at least this was how he perceived it.
This is not to forget the oil price war that Saudi Arabia waged on Russia. It is difficult to put all of those events in exact chronological order because they are all interwoven and happened almost concurrently. Back in 2016, Saudi Arabia decided to increase its oil production in order to drop the crude oil price and put pressure on Russia in Syria. The plan backfired and only resulted in a huge slump in the price of oil, and when MBS tried to reverse that decision and bring the crude price back up again, he was unable to.
MBS inherited a Saudi Arabia that was teetering on the edge. He had few options to restore its image and stature. It faced bankruptcy and for the first time since its oil boom nearly a whole century ago, it fell into debt and he took drastic domestic spending cut measures.
He had to do something.
His American allies during the Obama Administration convinced him that defeating the Houthis was going to be a walk in the park. MBS was led to believe that his venture in Yemen will be a swift blitz, and he gave it a name to that effect; Operation Decisive Storm.
The last thing that MBS wanted was a letdown from his American allies.
The Obama Administration however proved to be either unable or unwilling to provide him with what it took to win that war.
Trump, on the other hand, made his first overseas visit as a President to Saudi Arabia. He reassured the Saudis of America’s adherence to its obligations of protecting them and canceled Obama’s nuclear deal with Iran.
But the tables turned later on when Biden went further than Obama, making a 180-degree turn. He didn’t only threaten to cut off arms supplies to Saudi Arabia, but openly said that he is also desirous to resume talks with Iran in an attempt to resurrect the nuclear deal. In effect, Biden has breached the 1973 Petrodollar agreement and which clearly stipulates that the USA must protect Saudi Arabia.
A couple of weeks short of the seven years anniversary, nothing can excuse MBS for putting his ego before the lives and welfare of Yemeni people. That war has raged on for so long and created massive human tragedies.
So how do the events in Ukraine come into the picture?
With the global repercussions of the Russian operation in Ukraine reverberating all over the world, MBS is eyeing Uncle Sam, vowing that it is pay-back time.
America has actually requested ‘friendly’ countries to condemn the Russian action. Thus far, some, including Saudi Arabia and the UAE, have refrained from responding. This is an unprecedented Saudi stand.
In my previous article, I predicted that America’s sanctions against Russia would backfire. But, is MBS’s stand now related to the sanctions against Russia? The simple answer is yes.
America does not expect MBS to only condemn Russia and mirror the sanctions, but it also expects him to pump more oil into the global market in order to meet the shortfall created by the sanctions.
MBS is not playing ball the way America wants him to play. He is refusing to condemn Russia, thus far refusing to lift oil production. But most seriously, he is discussing with China doing oil transactions in the Yuan (Renminbi) instead of the USD.
Whilst the talks are not about doing all oil transactions in Yuan, it is however the beginning of a new trend that may see the eventual end of the Petrodollar. This is the first serious nail in its coffin.
If the Petrodollar collapses, quantitative easing (ie printing money) will constitute a more serious problem for the American economy.
Whilst writing the previous above-mentioned article, I did not expect that events were going to happen so quickly and that cracks alluding to the fall of the USD as the single global reserve currency were going show in less than a week. But here we are. The first steps have already been taken.
MBS seems to be maturing enough to know how to play the game of the big boys. What is really pertinent is that the so-called Petrodollar, and what is left of its future, rest in his hands; and America has no say in this. Even as I finalize this article, news of a USD collapse is already being reported on the mainstream media. With the deployment of the Kinzhal missile yesterday, the first-ever use of hypersonic weapons in combat, we can surely be certain that the changes we are witnessing now, economic or military, are not ones that the West ever desired or envisaged.