Analysis: The Petrodollar system holds a stable Middle East

The new US administration has shown its support for Saudi Arabia with this year’s weapons deal is a last ditch attempt to keep the Petrodollar alive.

The Dollar and Yuan compete for influence. (photo credit: REUTERS)
The Dollar and Yuan compete for influence.
(photo credit: REUTERS)
The “Oil for Dollars” system, created back in the early 70s, is moving ever closer to its demise and there will be some oil producing nations rejoicing the prospects, as the US unlikely to find another Dollar system any time soon.
The Petrodollar came into being following an agreement by the Saudis to price all of its oil bought by the US in US Dollars and in return, the US has delivered the Saudis weapons and, perhaps more importantly, provided much needed protection of their oil fields from aggressors in the region. The same region that has been a hotbed of instability since the dawn of time.
Just a few years later, The Saudi Kingdom’s control over OPEC led to all of OPEC’s members pricing oil in US Dollars in exchange for weapons and military protection. Some gained at the expense of others through the years.
Dollar appreciation prevailed, with the rise of the Dollar accelerating alongside rising demand for OPEC crude oil. That process was significant through the economic expansion cycle, which at the end of it, China is expected to be the next economic superpower.
Some nations have made attempts at moving away from the Petrodollar and all the frills and spills, the promise of military support certainly no longer relevant to certain OPEC members. Iran in particular has been under US sanctions for as long as many can remember, and Iran already dropped the Dollar earlier this year, with ‘Russia – Iran oil for goods deal’. The deal was harshly criticized by the US as the US administration accusing Iran of violating its interim nuclear agreement, which states that Iran is permitted to export no more than 1 million barrels per day of crude to China, India, Japan, South Korea, Taiwan and Turkey.
The US President had already been talking of the madness of removing the sanctions on Iran long before Russia’s offer to buy half a million barrels a day. On the other side, the Iranian government saying that it is not going to wait for permission from the US to increase oil exports. The US is a little busy with North Korea at the moment, but by the time they may eventually get to Iran, it might be too late.
It’s not just Russia that’s looking to drive a wedge between the Middle East and the US however, China, also, is vying for a spot at the top, forming alliances with Middle Eastern countries that have fallen foul of the U.S administration. Unsurprisingly, this includes Iran and Qatar, those two share the world’s largest natural gas field, which gives the two nations plenty of regional influence over trade deals.
Oil deals with China have already begun to be denominated in the Chinese Yuan. The Chinese government looking to join forces with the Russians in a bid to weaken the US through reduced demand for the US Dollar by bringing down the Petrodollar.
The Dollar’s role as the global reserve currency has largely been hinged on the existence of the Petrodollar because the demand for the Dollar is off the back of crude oil transactions. This gives the FED a free pass to print Dollars, which has a vested interest in continued global demand for the Dollar for that very reason.
If demand for the Dollar begins to slide, as nations shift away from the US Dollar, the FED and the US government begin to lose the ability to print the Dollar at free will.
The new US administration has shown its support for Saudi Arabia, despite continued speculation that the Kingdom was involved in 9/11, with this year’s weapons deal is a last ditch attempt to keep the Petrodollar alive. Also, it was an attempt to provide the Saudis with the means to maintain its status within the Middle East. Iran has been busy since the Obama years to build its position of strength within the region and some will suggest successfully. A position that has alarmed Israel, who have also been heavily reliant on the support of the US.
It might be time for the US administration to get a little anxious, with China looking to twist the Saudis' arm by incentivizing a replacement of the Petrodollar with the Yuan.
What a dilemma the Saudis are in…
Saudi Arabia is in no position to lose China as a buyer of its liquid gold, the Saudi economy is in tatters from its failed bid at world domination. The economic crash was a result of the crash in crude oil price when it fell to as low as $26.21 per barrel in early 2016, as concerns over market share continuing to weigh heavily on the Saudi’s willingness and even ability to restore oil price stability. It’s perhaps interesting that Russia agreed to join the OPEC agreement. Was this Putin wanting to have his finger in another pie? The Russian President already successfully planted the US administration, was more likely in the interest of removing Hillary Clinton and the Democrats from place in the oval office, than the incentive of placing Trump in that position.
If the Saudis decide to drop the Dollar then their status within the Middle East will certainly become more precarious with the Iranians waiting in the wings. It won’t just be the Saudis who will need to worry because a rebalancing of the Middle East will have far more reaching implications to even Israel. A state that has certainly benefited from US support, particularly since the beginning of the Iranian revolution and the rise of the fundamentalist.
China is Saudi Arabia’s largest export destination, with exports to China totaling $26.7bn, that’s a lot of Dollar to come off the table. Pretty much all of the exports come from crude and petroleum products and if the Saudis take the bait, that would surely be an end to the Petrodollar and with it the Dollar.
The attempts made by the US government to block the "Russia – Iran goods for oil deal" will eventually be trivialized when considering what’s really at stake for the US, as well as, the nations that have enjoyed US military since the early 70s.
From a Middle East perspective, Saudi Arabia and Israel are probably the first two names on Iran’s hit list. Once US protection falls away and, with the Russians and the Chinese already sharing technology and some pretty advanced weaponry, one does wonder how long it would take before there is a redrawing of the lines and a redirection of the pipelines.
What does all of this mean for Israel? From an Israeli perspective, perhaps, the US funding of Israel’s enemies will come to an end. Although a little too late because the money already gone out the door and served its purpose. However, the end of funding can be the only positive from such an outcome.
Without the Petrodollar, there’s no printing at the presses to fund the insatiable appetite the US has for conflict. Without the Dollars, Russia and more importantly China will have their way, sitting at the top of the tree, reversing the US rise to the top, in a way not too dissimilar to the Trump administration’s attempts to reverse the Obama’s legacy, but more likely, with far greater success.