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Petrodollar nuclear option?

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Reuters reports that Saudi Arabia has threatened to sell its oil in currencies other than the U.S. dollar if the bill becomes law. Such a move would have enormous implications.

The global oil market is almost entirely conducted in dollars, which provides the foundation for dollar domination in the global financial system. Introducing new currencies in the oil trade could undercut demand for the dollar, diminish American influence over global finance, weaken American influence over sanctions, and thus, undercut its geopolitical reach. It’s hard to assess how serious Saudi Arabia is, but the implications of such a move are far-reaching and hard to overstate.

“The Saudis know they have the dollar as the nuclear option,” a source familiar with the matter told Reuters. Another source put it this way: “The Saudis say: let the Americans pass NOPEC and it would be the U.S. economy that would fall apart.”

There's a lot to unpack here. During the Nixon administration, Henry Kissinger had the brilliant idea to cut a deal with the Saudis where the US would protect the kingdom and in exchange, they would denominate all the oil in dollars, which rescued the dollar from the free fall that occurred after Nixon turned his back on Bretton Woods and the gold standard. Only the old farts here remember the runaway inflation that "floating" the dollar caused. Remember price fixing? 

One of the reasons the dollar became the defacto reserve currency for the world is its status as petrodollar. Take that away and…

But wait, there's more. If Saudi Arabia reneged on the agreement, they're on their own militarily. Anyone believe those 15,000 princes will make an effective fighting force? 

Edited by Ward Smith
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The gold standard had already collapsed, we were going to have to sell off every thing at a silly discount to try and maintain it. Nixon was also huge on price controls, so many looney things and it took a decade for the currency to recover from the resultant mess. Remember the Reagan term, misery index. Unemployment plus inflation. It was crazy. And I remember those silly high interest rates than Carter put in place to stop the rot with Volker, and Reagan kept the money supply tight and indeed extended Volker another term. Right thing to do, it broke the cycle, but we had to endure a recession or two. And today's money supply games and too low interest rates scare the bejeezes out of me. People have forgotten.

KSA's military is best at protecting palaces. But there is no one around to attack them, the notion they need protecting from a land invasion, or even bombing, is silly. Syria barely kind of controls itself. Iraq, don't make me laugh. Kuwait or Qatar? Iran, we are already looking for an excuse to bomb them.  We encourage the Saudis and Qataris to buy lots of high end military toys, but that is a far different kettle of fish than having the ability to fight and project power.

 

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Iran is clearly the big threat. KSA can't even control their little neighbor to the south, which is already a failed state. But if they cut off their noses to spite our face, we might just have to let them. That means we don't come riding to their rescue, especially if Iran demonstrates what we all know, which is they've got nukes. Think what the price of oil will be then, and how happy our producers will be? 

As for the economic messes, you obviously lived through them too. The fiscal house of cards all the central banks are playing only need a little breeze…

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The whole "petro dollar" thing is not really a true financial construct. People have a misguided view of it. Bottom line is the US is the worlds largest trading partner and we use the dollar. If the Saudis want to buy F-15 fighter jets Tesla cars, or a refinery plant in houston, they need dollars. It's that simple..

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