Thursday, April 13, 2023

US-Saudi Petrodollar Deal Breaking Down as Russia Grabs Upper Hand

13 April 2023

The recently minted Saudi-Russia-China oil alliance, which paves the way for international oil trades to be settled in a currency of the vendors choice effectively spells the end of the 'Petrodollar' system, an agreement concluded in the early 1970s between Saudi Arabia, as the world's largest oil exporter, and the USA, issuer since the Bretton Woods agreement of 1945, of the main global reserve currency for international trade.

This development has the potential to cause all kinds of trouble for the US economy, which has been propped up for decades by the US$ status as reserve currency, because it enabled the USA to dictate to nations and organisations needing to buy dollars to settle their trades, what price the USA would pay for its imports and how much its trading partners would pay for US exports.. At the OPEC+ (Organisation of Petroleum Exporting Cpuntries,) meeting earlier this month the decision by member states to cut crude output, for the second time since President Joe (Where am I, what's going on,) Biden flew to Saudi Arabia last summer to plead with Crown Prince Mohammed bin Salman to increase oil output may be just the start of the oil producers revenge, after they have watched advanced nations try and fail to find alternative ways to power their economies which would have destroyed the oil producers revenue streams.

The April 2 announcement caused oil prices to spike by about $5 a barrel. OPEC’s projections on future demand show that the cuts will widen the supply shortfall later this year as futures contracts made before sanctions were applied to Russian oil exports expire. That means oil prices will go up further, with the usual knock on effects on food and manufactured goods, inflation will rise even faster, and recession risks become greater because consumers spending more on energy  and food will have less to spend on consumer goods. Worse, in spite of sanctions Russia is still managing to sell its oil via middle men in China, Iran, India, Pakistan and the Gulf States so Russian President Vladimir Putin, meanwhile, gets a bigger war-chest to fund his attack on Ukraine.

But what does the OPEC+ move tell us about the likely future for oil prices.

In a world of shifting geopolitical alliances, Saudi Arabia is breaking away from Washington’s orbit and cosying up to China and Russia which in addition to its detente with the traditional enemy and rival regional power Iran, is very bad news for businesses and citizens in the developed nations. The Saudis set oil production levels in coordination with Russia. When they wanted to ease tensions with regional rival Iran, they turned to China to broker a deal with the US left out of the loop. Western influence over the oil cartel, in other words, is no longer absolute and appears to be waning fast.

But while The White House  expects OPEC+ members  to dance to Washington's tune, all have their own priorities, from Saudi Crown Prince Mohammed Bin Salman’s ambitious plans to reinvent his economy, to Putin’s war. Any extra revenue they get from charging more for oil will help and also serve China's long term aim of replacing the US$ as reserve currency with a trading system of its own creation.

Asked about concerns that OPEC+ has twice cut production since Biden's visit to Saudi Arabia, a State Department spokesperson said the administration is focused on controlling domestic energy prices and ensuring US energy security, adding that the US views production cuts as inadvisable given ongoing market volatility.

Meanwhile, the threat of competition from US shale fields, a deterrent to price hikes in the past, has receded. And while there’s a global effort to reduce fossil-fuel use — and higher prices will accelerate that effort — the dash to drill in the last year shows that the zero-carbon economy remains in the realm of wishful thinking than an achievable target in the short term.

However for the global economy, lower oil supply and higher prices are doubly bad news. The major exporters are the big winners, of course. For importers, like most European countries, more expensive energy is a double blow — dragging on growth even as inflation rises. Bloomberg Economics’ SHOK model predicts that for every $5 increase in oil prices, US inflation will rise by 0.2 percentage point, which  at a time when the Federal Reserve is struggling to bring prices under control is not welcome.

There are three key reasons why more such shocks may be in store: The geopolitical shift, the maturing of shale, and the Saudi spending splurge.

For decades, the US-Saudi “oil for security” pact has been the foundation of of the energy market.  Symbolized by the 1945 meeting between President Franklin D. Roosevelt and King Abdul Aziz Ibn Saud, aboard a US cruiser in the Suez Canal, the deal to make US$ the reserve currency later gave the US access to Saudi oil in exchange for guaranteeing the kingdom’s security.

But the pact is no longer what it once was: 

In 2018, Washington Post columnist and Saudi dissident Jamal Khashoggi was assassinated at the Saudi consulate in Istanbul.

In 2019, Joe Biden — then a presidential candidate — threatened to turn Saudi Arabia into a pariah state and halt arms sales.

In 2021, early in the Biden presidency, the US government published an intelligence report assessing that Crown Prince Mohammed, the kingdom’s de facto ruler, was responsible for the Khashoggi assassination.

In October 2022, OPEC+ lowered oil production by 2 million barrels a day — less than three months after Biden flew to Riyadh seeking an increase. The White House blasted the move as “short-sighted.”

Last month, Saudi Arabia and Iran agreed to restore diplomatic ties in a deal brokered by China and signed in Beijing. The Saudi government has also agreed to join the Shanghai Cooperation Organization – a group with China and Russia at the helm, and seen as a rival to Western institutions,  as a “dialogue member”.

"The Saudis are looking for an aggressive hedge," said Jon Alterman, director of the Middle East Program at the Center for Strategic and International Studies, a Washington-based think tank. "Given what the Saudis see as a radically unpredictable US policy, they think it's irresponsible not to look for a hedge. And by radically unpredictable, you're looking at a US policy that changed sharply between Obama and Trump and Biden."

In the aftermath of the April 2 move, Saudi officials said it was motivated by national priorities rather than any diplomatic agenda.

“OPEC+ has succeeded now and in the past in stabilizing oil markets, and contrary to claims by Western and industrial states this has nothing to do with politics,” former Saudi oil ministry adviser Mohammad Al Sabban said, according to Asharq Al-Awsat newspaper


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