Thursday, October 24, 2013

Will the Saudis End the Petrodollar

If the news is making it known that the Saudis are extremely angry at the Obama administration, the anger has been brewing for months if not years. Prince Bandar and Prince Turki al-Faisal both voiced displeasure with Obama and company with mentions of Syria, Palestine, harumph harumph. The Saudis discuss cutting ties or a major shift but never quite define what they would do. This comes a couple of months after the Saudis supposedly offered the Russians a sweetheart deal for stepping back from Assad. This month has capped a summer of Chinese deals meant to circumvent the dollar, open the yuan to the international world and statements disapproving of the dollar and USG. Tie it all together, and the Saudis could end the petrodollar with a willing partner in China.

The Middle East is a rough place of sand, treachery and few, if any, good guys. If the US is cuddling up to Iran, why would we bother pissing off the local tough guy (Israel) and the rich kids (KSA + Qatar)? For years now, the rumor has been that the Saudis have given the Israelis the greenlight to use their airspace if they bomb Iran out of mutual interest in stopping Iran's nuclear program. Does the American foreign policy establishment believe it can restart the "Twin Pillars" policy of the Shah's era? This is a far different time. The Islamic civil war is going on, so a shared leadership of a region where a bathtub sized gulf separates the two big boys of opposing Islamic sides is not doable. The US is in far worse financial shape and far more dependent on external debt holders and financing. The Saudis are a giant in oil exports and in the US dollar system. Losing the KSA would signal to other oil members of the dollar system to look elsewhere and reject the petrodollar system.

Before considering why a Chinese-KSA alignment could work, why would the KSA be angry now? This goes into the Red Empire-Blue Empire divide, and the Bush family has a long history of cultivating the Red Empire client known as the KSA. Oil, patriarchs, wealth, weapons, interests align. Blue Empire has not aligned well with the KSA. The Blue Empire supports the Muslim Brotherhood in Egypt at every turn whether stopping Egyptian arms deals, plane deliveries or using the media organs to support the MB's legitimacy. The Blue Empire put the brakes on any airstrike when Bush was in office despite KSA pleading. Side note: the Blue Empire said the US should go after Iran instead of Iraq, but once Iraq was toppled, switched to "No bombing Iran". The Blue Empire is warming up to Iran whom the KSA has not just a religious opposition to but a decades long rivalry that oil companies and previous presidents had to manage. Blue didn't bomb Syria and has lost focus, but that feels more like a last gasp of Americans saying no. No, the Saudis are disgusted with the gum chewing, Blackberry checking geek. Why else would they have gone up to Russia to solicit Putin's assistance? Not a good run for flattering the rich sheiks that we rely on because of our thirst for gasoline.

If the KSA wants to truly get America's attention, they need not fire a single shot but let the Chinese pay for their oil in yuan. The Chinese import nearly as much oil from the KSA as America. The Chinese and KSA have a major refinery deal in place. A whopping 54% of all KSA oil exports are to Asia, so a nation like India may get in on the non-dollar payment act. India pays for Iranian oil in gold already. Even if no other Asian nations join the movement, China's imports are 1.3+/- million barrels per day from the KSA. China needs the oil as it is a manufacturing power, has a growing car market and has a growing military. China has plenty of problems, but they are accumulating gold continuously similar to the KSA. China's navy has limitations but what an incentive to develop a military it would be if the duty was to be the protector of the KSA? China offers military protection, sells weapons to the KSA to suppress any insurrections, gets all the oil it needs and gashes its economic rival in one move? The multiple agreements between the US and KSA would be hard to disengage from quickly. The KSA can maintain all its agreements with the US but just accept yuan from China for oil and still inflict major damage. That kind of shock can be leverage for the US to behave as the KSA wants once more.

One major drawback is that because both China and the KSA own so many USTs, they would be hurt by a drop in the dollar. True, unless they both protection for their investments from the fine boys on Wall Street. They could buy CDS on their own holdings in preparation for an announcement. If the dollar is dinged by their actions, where does liquidity go because it could benefit other KSA-Chinese holdings. The damage to the US would be an intangible value as well. Anyone doubting the Chinese supporting the KSA when they also support the Iranians fails to see that the Chinese support any dictator or regime as long as they keep the natural resources flowing. Sudan is Sunni Muslim. Iran is Shia Muslim. Both send oil to China. That is all that matters. China's String of Pearls policy and client building in Africa do not need to skip over the Arabian peninsula.

This is amateur analysis, but there is no such thing as allies only interests. America has been flip-flopping on who to support in the Middle East today in the name of democracy and in South America and sub-Sahara Africa during the Cold War to contain communist expansion. How much do American interests align now with the KSA compared to decades of old? America the multikulti, irreligious nation with a service economy resembles little of white, Christian, manufacturing powerhouse nation that struck agreements with the House of Saud. The Chinese and Saudis have economic interests and strengths that align now but the most important may provoke them to become bedfellows. Neither China nor Saudi Arabia are democracies in our era of missionary democracy and both are major holders of a currency with a terminal illness.

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