Guest Post: The Growing Rift With Saudi Arabia Threatens To Severely Damage The Petrodollar

Tyler Durden's picture

Submitted by Michael Snyder of The Economic Collapse blog,

The number one American export is U.S. dollars.  It is paper currency that is backed up by absolutely nothing, but the rest of the world has been using it to trade with one another and so there is tremendous global demand for our dollars.  The linchpin of this system is the petrodollar.  For decades, if you have wanted to buy oil virtually anywhere in the world you have had to do so with U.S. dollars.  But if one of the biggest oil exporters on the planet, such as Saudi Arabia, decided to start accepting other currencies as payment for oil, the petrodollar monopoly would disintegrate very rapidly.  For years, everyone assumed that nothing like that would happen any time soon, but now Saudi officials are warning of a "major shift" in relations with the United States.  In fact, the Saudis are so upset at the Obama administration that "all options" are reportedly "on the table".  If it gets to the point where the Saudis decide to make a major move away from the petrodollar monopoly, it will be absolutely catastrophic for the U.S. economy.

The biggest reason why having good relations with Saudi Arabia is so important to the United States is because the petrodollar monopoly will not work without them.  For decades, Washington D.C. has gone to extraordinary lengths to keep the Saudis happy.  But now the Saudis are becoming increasingly frustrated that the U.S. military is not being used to fight their wars for them.  The following is from a recent Daily Mail report...

Upset at President Barack Obama's policies on Iran and Syria, members of Saudi Arabia's ruling family are threatening a rift with the United States that could take the alliance between Washington and the kingdom to its lowest point in years.

 

Saudi Arabia's intelligence chief is vowing that the kingdom will make a 'major shift' in relations with the United States to protest perceived American inaction over Syria's civil war as well as recent U.S. overtures to Iran, a source close to Saudi policy said on Tuesday.

 

Prince Bandar bin Sultan told European diplomats that the United States had failed to act effectively against Syrian President Bashar al-Assad and the Israeli-Palestinian conflict, was growing closer to Tehran, and had failed to back Saudi support for Bahrain when it crushed an anti-government revolt in 2011, the source said.

Saudi Arabia desperately wants the U.S. military to intervene in the Syrian civil war on the side of the "rebels".  This has not happened yet, and the Saudis are very upset about that.

Of course the Saudis could always go and fight their own war, but that is not the way that the Saudis do things.

So since the Saudis are not getting their way, they are threatening to punish the U.S. for their inaction.  According to Reuters, the Saudis are saying that "all options are on the table now"...

Saudi Arabia, the world's biggest oil exporter, ploughs much of its earnings back into U.S. assets. Most of the Saudi central bank's net foreign assets of $690 billion are thought to be denominated in dollars, much of them in U.S. Treasury bonds.

 

"All options are on the table now, and for sure there will be some impact," the Saudi source said.

Sadly, most Americans have absolutely no idea how important all of this is.  If the Saudis break the petrodollar monopoly, it would severely damage the U.S. economy.  For those that do not fully understand the importance of the petrodollar, the following is a good summary of how the petrodollar works from an article by Christopher Doran...

In a nutshell, any country that wants to purchase oil from an oil producing country has to do so in U.S. dollars. This is a long standing agreement within all oil exporting nations, aka OPEC, the Organization of Petroleum Exporting Countries. The UK for example, cannot simply buy oil from Saudi Arabia by exchanging British pounds. Instead, the UK must exchange its pounds for U.S. dollars. The major exception at present is, of course, Iran.

 

This means that every country in the world that imports oil—which is the vast majority of the world's nations—has to have immense quantities of dollars in reserve.

 

These dollars of course are not hidden under the proverbial national mattress. They are invested. And because they are U.S. dollars, they are invested in U.S. Treasury bills and other interest bearing securities that can be easily converted to purchase dollar-priced commodities like oil. This is what has allowed the U.S. to run up trillions of dollars of debt: the rest of the world simply buys up that debt in the form of U.S. interest bearing securities.

This arrangement works out very well for the United States because we can wildly print money and run up gigantic amounts of debt and the rest of the world gobbles it all up.

In 2012, the United States ran a trade deficit of about $540,000,000,000 with the rest of the planet.  In other words, about half a trillion more dollars left the country than came into the country.  These dollars represent the number one "product" that the U.S. exports.  We make dollars and exchange them for the things that we need.  Major exporting countries (such as Saudi Arabia) take many of those dollars and "invest" them in our debt at ultra-low interest rates.  It is this system that makes our massively inflated standard of living possible.

When this system ends, the era of cheap imports and super low interest rates will be over and the "adjustment" to our standard of living will be excruciatingly painful.

And without a doubt, the day is rapidly approaching when the petrodollar monopoly will end.

Today, Russia is the number one exporter of oil in the world.

China is now the number one importer of oil in the world, and at this point they are actually importing more oil from Saudi Arabia than the United States is.

So why should Russia, China and virtually everyone else continue to be forced to use U.S. dollars to trade oil?

That is a very good question.

In fact, China has been making a whole lot of noise recently about the fact that it is time to start becoming less dependent on the U.S. dollar.  The following comes from a recent CNBC article authored by Michael Pento...

Our addictions to debt and cheap money have finally caused our major international creditors to call for an end to dollar hegemony and to push for a "de-Americanized" world.

 

China, the largest U.S. creditor with $1.28 trillion in Treasury bonds, recently put out a commentary through the state-run Xinhua news agency stating that, "Such alarming days when the destinies of others are in the hands of a hypocritical nation have to be terminated."

For much more on all of this, please see my previous article entitled "9 Signs That China Is Making A Move Against The U.S. Dollar".

But you very rarely hear anything about this on the evening news, and most Americans do not understand these things at all.  The fact that the U.S. produces the de facto reserve currency of the planet is an absolutely massive advantage for us.  According to John Mauldin, this advantage allows us to consume far more wealth than we actually produce...

What that means in practical terms is that the United States can purchase more with its currency than it produces and sells. In theory those accounts should balance.

 

But the world's reserve currency, for all intent and purposes, becomes a product. The world needs dollars in order to conduct its trade. Today, if someone in Peru wants to buy something from Thailand, they first convert their local currency into US dollars and then purchase the product with those dollars. Those dollars eventually wind up at the Central Bank of Thailand, which includes them in its reserve balance. When someone in Thailand wants to purchase an imported product, their bank accesses those dollars, which may go anywhere in the world that will take the US dollar, which is to say pretty much anywhere.

And as Mauldin went on to explain in that same article, a significant amount of the money that we ship out to the rest of the globe ends up getting reinvested in U.S. government debt...

That privilege allows US citizens to purchase goods and services at prices somewhat lower than those people in the rest of the world must pay. We can produce electronic fiat dollars, and the rest of the world accepts them because they need them to in order to trade with each other. And they do so because they trust the dollar more than they do any other currency that is readily available. You can take those dollars and come to the United States and purchase all manner of goods, including real estate and stocks. Just this week a Chinese company spent $600 million to buy a building in New York City. Such transactions happen all the time.

 

And there is one other item those dollars are used to pay for: US Treasury bonds. We buy oil and all manner of goods with our electronic dollars, and those dollars typically end up on the reserve balance sheets of other central banks, which buy our government bonds. It's hard to quantify the exact amount, but these transactions significantly lower the cost of borrowing for the US government. On a $16 trillion debt, every basis point (1/10 of 1%) means a saving of $16 billion annually. So 5 basis points would be $80 billion a year. There are credible estimates that the savings are well in excess of $100 billion a year. Thus, as the debt grows, the savings also grow! That also means the total debt compounds at a lower rate.

Unfortunately, this system only works if the rest of the planet has faith in it, and right now the United States is systematically destroying the faith that the rest of the world has in our financial system.

One way that this is being done is by our reckless accumulation of debt.  The U.S. national debt is now 37 times larger than it was 40 years ago, and we are on pace to accumulate more new debt under the 8 years of the Obama administration than we did under all of the other presidents in U.S. history combined.  The rest of the world is watching this and they are beginning to wonder if we are going to be able to pay them back the money that we owe them.

Quantitative easing is another factor that is severely damaging worldwide faith in the U.S. financial system.  The rest of the globe is watching as the Federal Reserve wildly prints up money and monetizes our debt.  They are beginning to wonder why they should continue to loan us gobs of money at super low interest rates when we are beginning to resemble the Weimar Republic.

The long-term damage that we are doing to the "U.S. brand" far, far outweighs any short-term benefits of quantitative easing.

And as Richard Koo has brilliantly demonstrated, quantitative easing is going to cause long-term interest rates to eventually rise much higher than they normally should have.

What all of this means is that the U.S. government and the Federal Reserve are systematically destroying the financial system that has enabled us to enjoy such a high standard of living for the past several decades.

Yes, the U.S. economy is not doing well at the moment, but we haven't seen anything yet.  When the monopoly of the petrodollar is broken, it is going to be absolutely devastating.

And as I wrote about the other day, when the next great economic crisis strikes it is going to pull back the curtain and reveal the rot and decay that have been eating away at the social fabric of America for a very long time.

Just check out what happened in Detroit recently.  The new police chief was almost carjacked while he was sitting in a clearly marked police vehicle...

Just four months on the job, Detroit’s new police chief got an early taste of the city’s hardscrabble streets.

 

While in his patrol car at an intersection on Jefferson two weeks ago, Police Chief James Craig was nearly carjacked, police spokeswoman Kelly Miner confirmed today.

Craig said he was in a marked police car with mounted lights when a man quickly tried to approach the side of his car. Craig, who became police chief in June, retold the story Monday during a program designed to crack down on carjackings.

Isn't that crazy?

These days, the criminals are not even afraid to go after the police while they are sitting in their own vehicles.

And this is just the beginning.  Things are going to get much, much worse than this.

So let us hope that this period of relative stability that we are enjoying right now will last for as long as possible.

The times ahead are going to be extremely challenging, and I hope that you are getting ready for them.

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localsavage's picture

At $4 gas, sentiment is against the Saudis.

resurger's picture

As long as Al-Saud are there, the Petro-D will continue. They are the right hand of Satan.

King_of_simpletons's picture

Rift with Saudi Arabia is always a good thing. The root cause of all evil in this world is that country's existence.

ZerOhead's picture

"If it gets to the point where the Saudis decide to make a major move away from the petrodollar monopoly, it will be absolutely catastrophic for the U.S. economy."

Let's see...

Saddam Hussein tried this > dead

Moammar Gadhafi tried this > dead

Personally I'm a little curious to see what happens to Bandar bin Bush and his extended family...

resurger's picture

Dont worry, they are pussies.

mickeyman's picture

He has raised the wrong finger.

ZerOhead's picture

Despite how persistently he may beg you... never.   ever.   pull that finger...

Almost Solvent's picture

Any article like this that does not address the fact that Saudi Arabia would become the next ward of the U.S. military is not facing reality.

 

WW3 will break out before the petro$ ends. Our military can't exist without it.

One World Mafia's picture

Not if they cut the purse strings.

James_Cole's picture

One way that this is being done is by our reckless accumulation of debt.  The U.S. national debt is now 37 times larger than it was 40 years ago

Nobody gives a shit about the debt, for the love of gawd. King dollar comes at the barrel of a gun - nothing else. 

Been that way since before North America was on the map, only difference was the weapons.  

One World Mafia's picture

The Saudis have too much control over the value of the dollar by way of the petro purse strings.

mjcOH1's picture

"Any article like this that does not address the fact that Saudi Arabia would become the next ward of the U.S. military is not facing reality."

Yep. Haven't you heard that the Saudis have gone rogue? They're supporting the Islamist rebels in Syria. And they're threatening us....they clearly said in the article that all options are on the table. I do believe the Kenyan could bring home another Nobel Peace prize if decides to save the world from this threat and goes for regime change.

Vampyroteuthis infernalis's picture

The Saudis are close to running out of their black gold. Does it matter over say 5-10 years?

balanced's picture

"Dont worry, they are pussies."

Hah. I was thinking the same thing. They are just like Boehner - spineless.

Urban Redneck's picture

Bandar is a half-breed, and the other half serves a purpose. What Turki said should be far more troubling.

Who cares what KSA does "independently" when both the GCC common currency is still on the table (and on a typically Arab schedule- inshallah, inshallah, inshallah) and the ongoing discussions of redenomination of the OPEC Basket to a currency basket are continuing (on a less Arab schedule)?

Deo vindice's picture

This is really an 'Obama issue' more than a Bandar one.

While everyone is moaning about how inept Obama is, I disagree. I think he has played this brilliantly. (evil, but brilliant).

If his goal is to bring the USA down to and to make it a disparaged country in the world, he has done a superb job at accomplishing that.

And how better to accomplish this goal than to have the US dollar cease being the reserve currency of the world?

lolmao500's picture

Don't you worry, they'll find a way to plant this on tea partiers.

walküre's picture

If Obama is muslim and works hand in hand with the Saudis to end the US zionist grip on the world, then all that Obama has done and is doing makes 100% perfect sense.

I need Another Beer's picture

Don't forget blaming the Jews too. I blame stupid people which are the Democrats and the people who voted them in.

GMadScientist's picture

Pretty much everyone except yourself. Coincidence?

NidStyles's picture

Except the US was on that path long before Doctor Choom-Wagon was in charge of more than his own breathing.

zhandax's picture

It doesn't look to me like odumbass is working hand in hand with anyone. Maybe mouth around cock with the stockholders of the frb.

Obese-Redneck's picture

Dats right crackerz, you all been suckin the saud balls for bout 50 years, and now you get angry cause you cant gassup the bassboat anymore?  What it costs 150 bennys to fill up your penis wagon? and now you get the picture, youve been twerking the kings phallus 4EVA, get it? How do you like dem apples?

UKdk's picture

Would save 'Uncle Vlad' a job! Guarantee he's marked Bandar Bush's card after bandar's threat's to unleash the Chechen's at Sochi. But then again maybe Vlad, the Chinese and House of Saud will come to an 'understanding', who know's in the new upside down world!

mkkby's picture

You are correct.  The saudis know that if the US withdraws the troops protecting them, they will be overthrown quickly by their many enemies.  So they will whine and threaten, but will do nothing.

These bastards stir up trouble around the world and keep their people down, only because the US military protects them.

Ar-Pharazôn's picture

+1 but honestly do you think that the american people is ready to accept this?

look what happened with iraq and afghanistan, saudi arabia would be worse than the 2 combined.

lotsoffun's picture

saudi was never sold weapons. they have no army.  they were sold 'awacs' radar only 'defense' aircraft.  they would be rolled over in a day.  the tiny isrealis could roll them over.  i wonder whose troll you are.  if you are a 'proud' saudi - i feel sorry for you.  as others pointed out here, iran was an empire for centuries as was iraq.  saudi is was a sand pile forever and has huge false population based on the fact that oil was discovered and that huge amount of money that was created was able to create huge imports of food and water that supports a population many times greater than what that land can support.  saudi is toast.  sorry pal.  enjoy the good times while you can. 

auntiesocial's picture

who's running this joint, anyway? 

 

-insert answer here-

lotsoffun's picture

exxon, bp, royal dutch shell, conoco, a few more.  massive profits.   used to be the auto companys were their partners, but they blew up by going into financing.  now the partners are defence, because they are really good at burning petrol for not reason and didn't go into financed, because we finance their profits for free.  is there really anybody that doesn't know this?

Eahudimac's picture

Nope. Try again. I'll give you a hint. It's where Wall St. is. 

Gief Gold Plox's picture

"Rift with Saudi Arabia is always a good thing. The root cause of all evil in this world is that country's existence."

Spoken like someone who hasn't read a single history book.

Stoploss's picture

Oh, so now it's blackmail huh?? 

Fight our wars, or we kill the petro dollar....

 

Hey, give it a shot an see what happens.

Meanwhile, maybe we should ask some of our unemployed youth, (yutes), how they would feel about working in the oil patch here at home???

That is actually a great idea. Fuck the petro dollar, zero taxes await the the home oil companies that create the most jobs in the safest way possible?

What?? You say? Maybe back off the regs enough to allow real R&D on safety?

LOL!!  I think we better stick to being mercenaries, blowing ourselves up regularly seems to suit us.

Keyser's picture

Independence from SA for crude oil is coming, but it will have to wait a few more years as Obama despises the oil industry and would shut it down entirely in the US if he could. 

 

Keyser's picture

Funny, I guess at least 5 people can't handle the truth. 

 

Element's picture

OT:

Just in, is this a coincidence?

Saudi Arabia is reporting dozens of anomalous glitches in Siemens industrial programmable logic controllers associated with their potable-water desalination plant network's operations. A concerned anonymous senior supervising engineer has told newsagencies off the record, that things were fine, " ... then suddenly around 7:04 AM this morning they were not fine, all those black boxes started acting like miscreants ..."

 

Engineers have been unable to identify any faults in the code or the hardware. "It's quite strange, we've not been able to reset any of the controllers, at this point despite numerous attempts, and we don't have spares sufficient to replace these, to get even one of the nation's desalination plants producing potable water. There is no emergency as such as we have approximately 80 hours of water storage capacity overhead, and water restrictions were implemented. We call it going on "camel mode", which is a part of our national emergency preparedness and planning."

 

Engineers have also been frustrated by a lack of after sales support. "We have attempted to contact the Siemens help-line for advice, many times, but they aren't answering, or else some infuriating Indian guy answers and puts us on hold, and then the line eventually drops out, and we lose the connection."

 

The engineer further added, "And their 'on-hold' piped muzak is quite atrocious, it keeps playing this silly old song by a band called 'America', "I've been through the desert on a horse with no name, it felt good to be out of the rain". Really! What is with that sort of thing?"

https://www.youtube.com/watch?v=l_NPSFEzsPc

 

Joe A's picture

Sort of a 'water for oil' programme similar to the 'food for oil programme' in Iraq?

Random's picture

HEHEHEHE, the old Stuxnet strategy? This would be true only if we ignore the fact that KSA and US proxy (via Israel) are playing for the same team.

snowlywhite's picture

it's blackmail in the head of this end of the world guy... Don't get me wrong, a big crash probably will come, but the chances it'll come from SA are as big as it comming from Liechtenstein... Saud&family would be toast without US in less than 5 years(and that's generous); thing of which I guess they're fully aware.

 

plus, there's always the option of switching SA with Iran; sure, there's the drawback that the iranians are nowhere as dumb or as easy to manipulate. OTOH, iranians had an empire for millenias, they are good at negociating stuff, so a decent deal can always come out of it.

 

everyone fears the sunnis; the second US drops them...

Seer's picture

Good take.

People need to keep in mind that "Saudia Arabia" = "Saudi Royal Family."  The "deal" was ALWAYS "oil for protection."  In order for the Royals to make the break from the US they'd have to have another "protector" lined up.  I'm not thinking it's Russia, which then only leaves China... does China really have the means? and, do they really want to start getting into the internal affairs of others?  And back to Russia...

Russia IS and ALWAYS will be the key.  Russia wants more of China's market.  I'd therefore figure that Russia wouldn't be aiding China in any way in any move of China's to latch on to the Saudis.

For those that haven't been paying attention, all the US activity in the ME is the result of the KNOWN problem of succession in the Saudi Royal Family.  Iran is much more stable (in comparison).

It's going to be a tough call on oil costs.  Although China's consumption is rising (and will do so for a bit longer) the rest of the world's consumption is dropping.  The major oil exporters are facing depleting oil reserves and increased internal consumption.  It's going to be one BIG tug-of-war, with all eventually being pulled to the ground: margins will evaporate.

GoldenTool's picture

I'd give you +1k on this if I could get the arrow to do it.

 

"Sapiens qui prospicit"

Tall Tom's picture

It is NOT BLACKMAIL. That is the deal that we made back in 1973 when we PERMANENTLY suspended Gold Dollar convertibility. The August 15, 1971 event was supposed to be temporary.

 

Henry Kissinger went over to the Saudis and struck the deal. The Saudis were REQUIRED, by TREATY, to accept ONLY US DOLLARS for Oil. Furthermore they were REQUIRED to INVEST in US TREASURIES.

 

We, in return, promised our Military to protect them from Foreign invasion and protect them from internal uprising.

 

Syria is a threat to the Internal Stability of the House of Saud. By refusing to overthrow Assad's Syrian Regime and by making overtures for peace with Iran the UNITED STATES is BREAKING the TERMS and CONDITIONS of our Treaty.

 

This is not Saudi Arabia acting. This is the United States FAILING to live up to OUR AGREEMENT.

 

We have lived quite well because of the House of Saud keeping their end of their bargain.

 

Perhaps we need to keep ours if we want to maintain the World's Reserve Currency status?

 

I am tired of the United States playing itself as if it were a victim when it is the INSTIGATOR.

 

Personally I find it abhorrent that we made the deal in the first place.

 

Personally I find it abhorrent that we left the Gold Standard.

 

But we need to own up to our own actions and not place the blame on others when it squarely belongs on us.

 

Victim Mentality sucks.

Seer's picture

It's like two-way-blackmail... and, it's really blackmail against the non-royals in SA.

But, yes, I'm not so sure "blackmail" is really the appropriate term to apply.  When dependencies are so large and when things get a bit unstable BOTH side are reminded of how fragile things can be.

Bandar bin Bush is the Henry Kissinger of Saudi Arabia.  It's all a big chess match.  Bandar is looking to renegotiate for a better deal.  As I note above, I don't think that the Chinese are going to play the role of protector.

This is just part of the great unwinding, which will ultimately find the Saudis back to relying more on camels for transport (and the US on bicycles/horses?).

mkkby's picture

If we neuter Syria and Iran, Saudi won't have any meaningful enemies any more.  Then they won't be so depandant on US protection, and can disengage from the petro dollar.

Obama is just weak.  But he may be accidentally be winning the chess game.  Keep them scared so they need us is the game.

outamyeffinway's picture

Kabuki theatre. They know what's coming. Publicly moving away over Syria because they're "mad". Syrian war might have been cover for forthcoming dollar collapse??? The world is a stage....

AlaricBalth's picture

How formidable would a gold backed Petro-Yuan be?

willwork4food's picture

Should I tell my wife that it might not be a good idea to get that $3000 pit group at this time?

kralizec's picture

This is much closer to reality...the Saudis cannot do squat about ending the special relationship with the US without finding a new dance partner!