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Irina Slav

Irina Slav

Irina is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing on the oil and gas industry.

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Saudi Arabia Threatens To Drop Dollar For Oil Trades

Saudi Arabia has threatened the United States to stop using dollars for its oil trades in an attempt to discourage legislators from passing a bill dubbed NOPEC aimed at holding OPEC liable for cartel practices under U.S. law.

Reuters reports, citing unnamed sources, that the switch from U.S. dollars to other currencies had been discussed in senior Saudi circles and that it had also been shared with U.S. government officials from the energy department.

The reported threat takes OPEC’s—Saudi Arabia’s—offensive against the No Oil Producing and Exporting Cartels Act a step further after last month UAE oil minister, Suhail al-Mazrouei, reportedly told lenders at the meeting that if the bill was made into law that made OPEC members liable to U.S. anti-cartel legislation, the group, which is to all intents and purposes indeed a cartel, would break up and every member would boost production to its maximum.

This would be a repeat of what happened in 2013 and 2014, and ultimately led to another oil price crash like the one that saw Brent crude and WTI sink below US$30 a barrel. As a result, a lot of U.S. shale-focused, debt-dependent producers would go under.

Now, one of the Reuters sources said, “The Saudis say: let the Americans pass NOPEC and it would be the U.S. economy that would fall apart.”

Another source commented “The Saudis know they have the dollar as the nuclear option.”

Other countries are already using other currencies in oil trades, notably Russia and Iran, but also China, for some of its trades. China even launched a yuan-denominated oil contract last year, which initially sparked concern. Later, this subsided as the hype died out and the contract failed to remove dollar-denominated European, Middle Eastern, and U.S. contracts from the market.

Still, if an oil seller as big as Saudi Arabia were to drop the dollar as its default trade currency, this would have strong reverberations for the greenback’s status as the world’s dominant currency and it might also spur similar moves by other oil exporters who are likely to feel threatened by the NOPEC bill.

By Irina Slav for Oilprice.com

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  • Mamdouh Salameh on April 05 2019 said:
    The United States should take Saudi Arabia’s threat of dropping the petrodollar very seriously since the Saudis played a major role in bringing the petrodollar into existence in the aftermath of the collapse of the Gold Standard in 1971.

    Saudi Arabia’s threat is aimed at discouraging the US Congress from passing a bill dubbed NOPEC aimed at holding OPEC liable for cartel practices under US law and also pre-empting any threat by President Trump to sue OPEC or its members for alleged manipulation of oil prices. The Saudis are reported to have said “let the Americans pass NOPEC and it would be the US economy that would fall apart”.

    Where the Saudis to drop the petrodollar, they will most probably be followed by the overwhelming majority of OPEC members. That would lead to the collapse of the petrodollar with catastrophic impact on 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 World War II under the Bretton Woods agreements. These agreements also established the US dollar as the reserve currency of the world. Former president Richard Nixon and his then foreign secretary Henry Kissinger understood that the collapse of the gold standard system would cause a decline in the global demand for the US dollar.

    Maintaining that “artificial dollar demand” was vital for the United States’ economy. So the United States under Nixon struck a deal in 1973 with Saudi Arabia under which every barrel of oil purchased from the Saudis would be denominated in US dollars only. In 1975, all of the OPEC nations agreed to follow suit.

    The petrodollar system provides at least three immediate benefits to the United States. (1) It increases global demand for US dollars. (2) It also increases global demand for US debt securities and (3) it gives the United States the ability to buy oil with a currency it can print at will. In geopolitical and economic terms, the petrodollar lends vast power to the United States. Maintaining the petrodollar is America’s primary goal. Everything else is secondary.

    Saudi Arabia currently sells less than 1 million barrels of oil a day (mbd) to the United States. More than 75% of Saudi crude oil exports go now to the Asia-Pacific region particularly China. Saudi Arabia is under pressure from China to accept the petro-yuan as payment for its oil exports if it wants to avoid losing more market share to Russia in the Chinese oil market.

    With the petro-yuan a reality now, China will, in effect, be making a claim to global oil reserves. The petro-yuan could be a death blow for an already weakened US dollar and the emergence of the yuan as the dominant world currency.

    In a research paper titled:” Will the Petro-Yuan Be the Death Knell for the Petrodollar?” published by the US Association for Energy Economics on the 17th of April 2018 (USAEE Paper No:18-338), I concluded that the Chinese yuan will probably emerge as the world’s top reserve currency within the next decade with the petro-yuan dominating global oil trade.

    Still, Saudi-led OPEC shouldn’t be unduly worried about the passing of NOPEC legislation first and foremost because it is not a cartel and has never been one through its history. Second OPEC has enough firepower to retaliate against the US and inflict damage on the US economy where it hurts most, namely high oil prices and a switch from the petrodollar to the petro-yuan thus the undermining the core of the US financial system.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Al Fawzy on April 06 2019 said:
    Ok when and if the Saudi government try to drop the US Dollar make sure the royal family will be dropped from Saudi Arabia.
    Mr. Trump all ready told the KIng of Saudi Arabia with out us your family won't be in power with in two weeks .

    If anyone in Saudi Arabia thinks for a moment that USA will allow that to happen they must think very hard before doing so.
  • Tony Montana on April 09 2019 said:
    @Mamdouh ... well written ... but you have forgotten to mention where the Saudi Arabs will get their arms to fight the "political riots" which will be the response of the US in case the Saudi Arabs move to the petro-yuan?!

    Wake up my friend ... The Saudis are just a vassal state of the US!
  • Rudolf Huber on April 09 2019 said:
    Regardless of how positively or negatively one might be inclined to think of the NOPEC bill, Saudi Arabia has this nuclear option only once. They may continue selling their oil for whatever currency they like but the arrangement with the US also provides a veneer of stability for the Kingdom. China and/or Russia could not step into this role if they wanted. Their power projection capabilities are severely limited. Besides, cutting those ties would be a nasty shock to the US but the US economy is infinitely more entrepreneurial than any economy in the Gulf. It would take the bloody nose, stumble, redress itself and likely emerge stronger from it in the long term. That's the nature of entrepreneurs. Don't mess ...

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