Saudi security versus petrodollar
Breaking the link between the oil and the dollar is a project that has been in the making for quite some time.
On March 10, 2023, China brokered a peace agreement between rivals Iran and Saudi Arabia, a move that left the West baffled. Some suggested that the world had witnessed the slow and gradual collapse of the old world order. Although the deal may not necessarily achieve full normalization, still points of contact were restored. Such an event vexed policymakers while at the same ushered in an era of Chinese diplomatic victory in the area most crucial to US global dominance. The implications of such an agreement are multiple, but the potential loss of Saudi to the US, and the gradual dissolution of their institutional ties, especially the long-standing agreement by which Saudi sells its oil for dollars, may yet prove to be a world significant event.
This detente is a breakthrough in terms of heralding peace and development in the region. It comes at a time when relations between China and the US have reached an all-time low. After several months of provocations aimed at disrupting Beijing through provocations around Taipei, it appears that China had turned the tables on the US' most sensitive point, which is its hegemony over the gulf. The ramifications are too broad, but here I address the implications of the petrodollar system.
The petrodollar system was born of an agreement between the US and Saudi Arabia to peg the sales of oil in exchange for security guarantees and Saudi assistance with US foreign policy missions. Aside from petrodollar recycling, the benefit of pricing oil in dollars has all to do with increasing US indebtedness in the dollar, which in turn increases its wealth, since the US prints the 'paper dollars' as the equivalent of world wealth. This also means that the US must lay control not only over current world assets, but must also own the future work and assets of humanity to underwrite its massive wealth. For this, The US must be in control of the world’s strategic resources, choke points, and foremost the ideological production that cripples anti-systemic thought. On a more concrete level, since OPEC entities get paid in none other than the dollar, the profits earned from oil revenues are re-invested in US treasuries and other instruments so as to avoid the loss of value in times of economic downturns. The constant flow of dollars channeled into bonds, allows the US to finance its deficits and to be in a position to trade debts against their future values.
The depth of the US financial market, and the ability of the dollar to be a world medium of savings in addition to world means of exchange, are tied to the global demand for dollars. If the dollarization of oil lessens, then demand for dollars lessens, and the dollar as a safe refuge from financial turmoil abroad also lessens. As can be seen, the US must reconstitute its powers in the military and ideological fields to reinstall the dollar and siphon world wealth through it. Incidentally, the China-sponsored deal represents an image or ideological blow to the US because it has shown China as a peace-maker and the US as a war-monger. The implications of slow de-dollarization are that the US may no longer be able to build its wealth by borrowing against a world it controls.
Read more: De-dollarization, Slowly but surely
Pricing oil to the US dollar has proved efficient to underwrite the wealth of the US-allied financial class. The equation more control equals more wealth meant that the US’s engagement in imperialist politics has always been about power first, especially ideological power wrought by beating and sanctioning people abroad. The US hegemony is first a hegemony over the global mind of defeated people. As the Arab proverb goes, one makes a friend out of beating him first.
The Saudis were pivotal in the ascent of the US. In addition to the many examples, i.e. aiding the contras to fight Abdel-Nasser in Yemen, and the list goes on, they essentially helped the US win the Cold War because the dollarization of oil permitted them to financially contain Eastern European countries as they overburdened them with dollar debts. Lending to cripple an economy is just as good a weapon as any. Not to forget, the Saudis also allowed the price of oil to be listed on the commodity market by weakening OPEC at the behest of the US. Direct producers of oil lost control of oil prices. Saudi pumped oil earned fewer profits than it should have as a part of the power game with the Soviet Union then. This was owed to a meeting held in 1985 between King Fahd and William Casey, the former CIA director, in which both agreed to increase oil production from 2 billion bpd to 10 billion bpd, leading oil prices to fall from $30 to $10 and eventually resulting in the fallout of the Soviet economy.
In the region, the Saudis assisted US aspirations through the numerous wars against more autonomous states across the region. The proliferation of Salafism and the financing of disruptive militias instigated wars that were a win-win situation for the US. It weakened opposing regimes and made money off military spending.
Yet with war waged on Yemen, tensions with Iran, and a balance of forces tilting in favor of the axis of resistance, it is only rational for the Saudis to forfeit the US and seek longer-term stability through negotiated dialogue. The deal that the US provides Saudi with security as Saudi prices its oil in the dollar seems to be no longer valid. The US is retreating around the globe, and while it cannot afford Saudi security, the Saudis will rethink their pricing of oil only in dollars. Add to that the personal vilification of MBS and the openly anti-Arab racism practiced daily in Western media and other channels.
On a more detailed level, Saudi security demands are threefold: first, to grant a major non-NATO ally status; second, to receive additional sales of advanced US weapons; and third, to receive US support for a civilian nuclear energy program. With the first condition fulfilled and the second being contested, the third would evoke the possibility for Saudi authorities to develop their own fissile material, hence enabling the capacity of building a nuclear weapon. The US is less concerned with nuclear proliferation than the military autonomization of Saudi Arabia as this would jeopardize the agreement that safeguards the petrodollar system. US reluctance to respond to Saudi Arabia's security needs was made obvious when Democrat lawmakers urged US President Joe Biden to discourage Saudis from enhancing their own ballistic missiles and drone capabilities in 2022. A letter was issued just a few days prior to Biden's visit to Saudi Arabia in June 2022 and highlighted concerns from the Pentagon that the Gulf state was planning to manufacture solid fuel missiles with assistance from China.
Another relevant factor to consider is threats issued by the US that it would pull away military support following the announcement of the OPEC cut in October 2022, as well as the introduction of the NOPEC bill which would enable lawsuits to be filed against Saudi Arabia and OPEC entities for controlling oil prices. If such a bill would come to pass, it would highlight the possibility of Saudi Arabia being slapped with sanctions. With the Iran-Saudi deal announced, it appears that China has rocked the foundations on which the petrodollar system rests. This was further evidenced by the introduction of a Privileged Resolution by Senators Murphy and Lee calling for a complete halt of US military assistance to Saudi Arabia, noting that "US weapons do not belong in the hands of human rights abusers."
Breaking the link between the oil and the dollar is a project that has been in the making for quite some time. Both Russia and China have been buying immense amounts of gold to rid their foreign reserves in US dollars and back their own currencies on the gold standard. With their BRICS allies, they are contemplating a common currency that would shift away from transactions carried out in US dollars. Although many signs seem to be pointing out the gradual decline of the petrodollar system, it is unlikely that it may happen in the short run.
The petrodollar will remain the dominant currency as long as the dollar is recognized as the world reserve currency. As we speak, the global share of foreign reserves denominated in US dollars currently fell to slightly below 60%. States and companies across the world are still required to own dollars in order to purchase oil - the most strategic commodity on the global market. After all that is said and done, the decline of the dollar is tied to the decline of the US’s control of the planet, which until now held de-facto ownership of the planet.