Saudi Arabia threatened to use the “nuclear option” of undermining the petro-dollar if the U.S. moves forward with the NOPEC bill.
The U.S. Congress has been mulling legislation, known as the NOPEC bill, which would allow the Justice Department to take antitrust action against OPEC for manipulating the oil market. Specifically, the bill would remove sovereign immunity countries have from such action, allowing the U.S. government to sue. In theory, the law would prevent OPEC from coordinating production cuts.
It’s still unclear if the Congress will pass the bill, and it’s also not guaranteed that Trump will sign the bill if it reaches his desk. Moreover, even if he did sign it, it’s also not a done deal that the Justice Department would take punitive action.
Nevertheless, Saudi Arabia clearly views the threat as a serious one. 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.”
Some version of the NOPEC legislation has floated around for years, but past U.S. presidents from both parties have opposed the measure over fears that it would damage the U.S.-Saudi relationship. This time around, the situation is different, for several reasons. First, Saudi Arabia has seriously damaged its standing in Washington through its war in Yemen and over the murder of Saudi journalist Jamal Khashoggi. With goodwill evaporating, its grip on the U.S. Congress has weakened. Related: What’s Next For Algeria As Bouteflika Steps Down
The House and Senate just passed a bill that cuts off U.S. aid for the Saudi war in Yemen, a historic rebuke to Saudi Arabia as well as a historic move to weaken the American executive branch’s authority over war. President Trump will likely veto the bill, but a few years ago, such a vote was unthinkable. Saudi Arabia’s missteps contributed greatly to the passage of the bill.
Another reason why the odds of NOPEC becoming law are greater than ever are because of the unpredictable nature of Trump himself. He has embraced the Saudi government, but he also uses OPEC as a punching bag. Although the Saudis, to a large degree, control OPEC decisions, they are distinct entities in Trump’s mind. Only a few days ago he tweeted: “Very important that OPEC increase the flow of Oil. World Markets are fragile, price of Oil getting too high. Thank you!”
To the extent that oil prices are high and Trump feels that gasoline prices become a political liability, he may feel more compelled to sign a NOPEC bill.
That brings us back to the Saudi threat to undermine the dollar. If Riyadh actually carried out such a threat to switch away from the dollar for oil sales – which is definitely not a sure thing – it would have some eager partners. China, Russia, Iran and even the European Union have all at times supported some alternative to the dollar-based international order. The Trump administration’s excessive use of sanctions, and its bullying of key allies in Europe, have many governments ready for currency substitutes.
As Reuters notes, Russia has tried to sell oil in euros while China setup a yuan-denominated oil contract in Shanghai to rival the dollar. Iran has also eagerly tried to promote oil sales in other currencies in order to skirt U.S. sanctions. The EU setup a special purpose vehicle to help European companies continue to do business with Iran, and it also recently set up a working group to promote the euro as an alternative to the dollar. Related: The Energy Solution That Could End The Border Wall Debate
To date, those efforts have done little to undercut dollar domination. But a Saudi decision to diversify away from the dollar would be the most powerful move yet.
However, there are plenty of reasons why this scenario won’t play out. The bill may not pass the U.S. Congress to begin with. But even if it became law, the Saudis have plenty of obstacles standing in their way, not the least of which is their currency peg with the dollar. Riyadh is also dependent on the U.S. military alliance, and dumping the dollar would put that in jeopardy. Those reasons alone might deter Saudi Arabia from moving forward with currency alternatives.
A separate threat, which is arguably more doable from the Saudi standpoint, would be to produce oil at maximum levels to crash prices. OPEC officials have reportedly been telling Wall Street executives that they would be forced to take such action if the NOPEC bill becomes law. “NOPEC legislation won’t serve the U.S. interest,” OPEC Secretary General Mohammad Barkindo said in March in Houston at the CERAWeek Conference.
By Nick Cunningham of Oilprice.com
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In its effort to wrest more control over global oil markets away from OPEC, the US Congress has been pushing a bill dubbed as NOPEC that would let the US sue OPEC for an alleged oil price fixing.
However, it is the United States which has so far broken the rules of the World Trade Organization (WTO) by imposing sanctions on virtually everybody, walked away from United Nations-recognized Iran nuclear deal and also the UN-supported Climate Treaty without batting an eye lid. Moreover, it is the the United States which has been manipulating oil prices through the petrodollar and also through exaggerated claims about rises in US oil production and huge build-up in its oil and refined products inventories in order to depress oil prices and achieve geopolitical and economic aims.
The Saudi threat against the petrodollar should be taken very seriously since Saudi Arabia played a pivotal role in bringing the petrodollar into existence in the aftermath of the collapse of the God Standard in 1971. Were 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.
Adding the oil production of OPEC to China’s oi imports and Russia’s, Iran’s and Venezuela’s oil exports will amount to more than 51 million barrels a day (mbd) accounting for 75% of globally traded oil. Were the European Union (EU) to opt to use its euro for payment for its oil imports, that will undermine the petrodollar in a huge way threatening not only the dominance of the petrodollar in the global oil trade but also the US financial system which is the core of the global financial system.
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 power to the United States. Maintaining the petrodollar is America’s primary goal. Everything else is secondary.
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. The implications of such a move are far-reaching and hard to overstate.
The claim that Saudi Arabia might be deterred from dropping the petrodollar because its currency is pegged to the dollar or because it is dependent on US military alliance doesn’t hold water as the Saudis could easily de-peg their currency from the dollar and build alternative military alliances with countries like China and Russia.
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 the death knell for the petrodollar.
Still, OPEC shouldn’t be unduly worried about the passing of NOPEC legislation or threats by the United States to sue it for what is alleged to be cartel practices under US law 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
The petro yuan? Good luck with that. The United States is can sustain itself with its own crude oil, natural gas, and coal production and export to its allies. What other country can do that? Not to mention the US has the most powerful military on the planet and the largest economy upon which most other economies depend, especially China.
Should the US economy implode for some reckless Saudi stunt there will be no safer place to invest than in assets priced in US dollars.