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The Ultimate Pivot: Saudi Betrayal Of The Petrodollar

The Ultimate Pivot: Saudi Betrayal Of The Petrodollar thumbnail

Saudi Arabia has gone nuclear, threatening the petrodollar. Or has it?

The report from Zerohedge via Reuters that Saudi Arabia is angry with the U.S. for considering a bill exposing OPEC to U.S. antitrust law is a trial balloon.

The chances of the U.S. bill known as NOPEC coming into force are slim and Saudi Arabia would be unlikely to follow through, but the fact Riyadh is considering such a drastic step is a sign of the kingdom’s annoyance about potential U.S. legal challenges to OPEC.

If these things are so unlikely then why make the threat public? There are a number of reasons.

First, one must remember that the Saudis are hemorrhaging money. Their primary budget deficit in 2018 was around 7% of GDP. Since the 2014 crash in oil prices it has gone from almost zero sovereign debt to $180 billion in debt to finance its spending, or around 22% of GDP.

2019’s budget will be even bigger as it tries to deficit spend its way to growth. It’s needs for a higher oil price are built into their primary budget not their production costs, which are some of the lowest in the world.

Second, the Saudis finally opened up the books on Saudi-Aramco this week. And it revealed the giant is far more profitable than thought. It has is eye on acquiring stakes in some of the biggest oil and gas projects out there these past couple of years. It’s floating its first public bond to buy a stake in SABIC to get into the mid and downstream petroleum markets.

Third, the Saudis budget deficit is tied directly to its having pegged the Riyal to the U.S. dollar which leaves them at the mercy of the dollar price of oil. It doesn’t have the flexibility of Russia who free-floated the ruble back in late 2014 to pay local expenses in devalued local currency when oil prices drop.

This is why the Saudis are struggling financially and why Aramco is looking to use its financial might to finally begin making friends and influencing people around the world.

So, a threat to de-couple Saudi oil sales from the dollar is a threat a long time coming.I’ve been talking about this day since I started this blog and for years previous when I wrote for Newsmax.

The petrodollar still forms the backbone of how the U.S. dollar maintains its reserve currency status. That a vast majority of the oil trade is still settled in dollars creates a synthetic form of demand for U.S. debt, which, in turn, liquefies world trade.

The Saudis need budgetary flexibility to assist Crown Prince Mohammed bin Salman’s Vision 2030 plan to remake the Saudi economy a reality. Deficit spending and gutting the country’s balance sheet is not the path to sustainable prosperity.

But since l’affair Kashoggi last fall relations between the U.S. and Saudi Arabia have been deteriorating. The division between a now-hostile U.S. legislature and a deal-making Trump is intensifying.

Congress is forcing President Trump to veto their bill to end U.S. support for the Saudis war in Yemen, another bin Salman tragedy. At the same time, Saudi Arabia is a key part of Trump’s plans to secure peace for Israel (sold as his Deal of the Century to be unveiled on Israeli Independence Day no less).

So Trump needs the Saudis to stay on board with the plan. But the tensions are rising because the Saudis can see how the political and economic winds are shifting. Trump has been running roughshod over the Saudis, shaking them down for weapon sales while trying to take oil market share from them.

About the only area they agree on anymore is their hatred for Iran, which is driven by Trump’s arch-neocon/Israeli Firster cabinet. The Saudis are in an increasingly untenable position and can’t get any relief from either the U.S. or Russia.

So, the conventional wisdom, expressed by the Saudis, is that the U.S. needs the petrodollar to maintain its position of world power. Trump is trying to do just that not by enforcing compliance on the Saudis but by increasing our domestic exports while restricting supply from marginal producers like Libya, Venezuela, Iraq and Iran.

That would give Trump the leverage he needs to confront China, a massive energy importer. But China is also a major Saudi customer and that’s where this threat gets interesting.

China is the one pushing the Saudis to accept yuan for their oil. De-pegging the riyal is the only way they could do that and still manage their foreign exchange reserves.

At the same time, though, Trump wants a weaker dollar because he needs that to fund his gross fiscal debauchery to spend our grandchildren into debtor’s prison.

He even went so far as to instruct the Fed to stop QT, drop rates and even do more QE because the ‘economy is so strong.’ He’s become a cartoon of himself at this point. He needs the Fed to end QT so he can sell more than a trillion of new debt at low rates into the market to fund his insane budget.

And this lends credence to the theory that Trump is actually trying to end the dollar’s reserve currency status. But, like I just said, if he were interested in that he wouldn’t be running the biggest deficit in the country’s history, he would be cutting spending overall.

The situation is beyond complicated but it boils down to the simplest of things. That which is unsustainable will end. The petrodollar is one of those things. It will be torn apart by Saudi spending needs, China’s willingness to buy oil from everyone else, including the U.S., and the waning U.S. influence in the Middle East.

If not today or next week, than in the near future. The question is whether the U.S. is prepared for it or not. Right now the dollar is king. A decade of ZIRP has created a massive synthetic short position in the dollar in the form of emerging market corporate and real estate debt.

But after that? And after that synthetic short pushes the dollar much higher and the price of oil into the floor? That’s when things get truly interesting. For now, the Saudis are making noise. With oil trading in the $60s no one is losing too much money or market share too quickly.

And so the status quo will prevail, for now.

Tom Luongo



24 Comments on "The Ultimate Pivot: Saudi Betrayal Of The Petrodollar"

  1. Outcast_Searcher on Sun, 7th Apr 2019 7:12 pm 

    Gold, goats, and guns. OK, so now I see why this nonsense is being posted.

    First, how often does zerohedge get any call right? Especially considering decent timing or for anything actionable? I say they bat near zero percent.

    Next, as long as the Forex markets exist and are trading a good $5 TRILLION of major currencies a DAY, this whole idea that the petrodollar matters in modern times is nonsense.

    It mattered in the 70’s during the oil crises, and it likely mattered up to perhaps 10 years ago to some extent, but now with the modern, fast, reliable, computer networks, the idea of the Petrodollar is, at most, a minor inconenience for ANY organization with financial means, and a bit of financial acumen (or the ability to hire it).

    Any entity of means can hold ANY basket of major currencies they can afford, and trade it quickly, easily, and for low cost.

    Don’t like dollars? So hedge your petrodollar holdings in yen, or Euros, or gold, or whatever you please.

    Case closed — time to look for something more realistic when yelling about doom — and trying to drum up money for a gold, farm animals, guns, etc. business.

  2. Davy on Sun, 7th Apr 2019 11:04 pm 

    Everything on Zerohedge is the truth dumbass, accept when they say bad things about the USA. Than it’s all BS.

    I have gold, a gun, and a goat. WTF do you have stupid?

    Ban outcast from my web sight and deport him from my country. We don’t want dumbasses like you in my country anymore idiot.

  3. Not Davy on Mon, 8th Apr 2019 12:44 am 

    JuanPee post not Davy.

    Juanpee is crazy y’all I tell ya he’s CRAZY!!!!!

    Davy on Sun, 7th Apr 2019 11:04 pm

  4. Davy on Mon, 8th Apr 2019 12:53 am 

    Birds of a feather flock together aka my fascination with all things JuanP.

    Why do I do this? Please will SOMEONE help me? I can offer free room & board in the chicken coup PLUS unlimited conspiracy theory banter.

  5. makati1 on Mon, 8th Apr 2019 3:44 am 

    Outcast, you do know that most of the world’s trade is in USDs? That they have to go thru the BIS? That gives the US control of most trade. It allows the US to “sanction” anyone any time for any reason or none. And to print unlimited dollars to buy things. Mafia thugs in any other name.

    The rest of the world is trying to break that monopoly and is being led by Russia and China. The day the Saudis decide to sell oil for other than USDs, the game is over for the empire. The is why the US kisses the Saudi ass and ignores their beheadings and other barbaric actions. At some point, the switch will happen and then, 3rd world America becomes obvious. Blow-back will be a bitch, most deserved.

  6. Timothy Blaine on Mon, 8th Apr 2019 5:14 am 

    Outcast is a Trumptard so any criticism of his Dear Leader summons forth a stupid comment about gold, goats, and guns.

  7. Not Davy on Mon, 8th Apr 2019 5:24 am 

    JuanP posting Davy did not post this

    Davy on Sun, 7th Apr 2019 11:04 pm
    Not Davy on Mon, 8th Apr 2019 12:44 am
    Davy on Mon, 8th Apr 2019 12:53 am

  8. JuanP sock on Mon, 8th Apr 2019 5:24 am 

    More JuanP sock puppetry

    Timothy Blaine on Mon, 8th Apr 2019 5:14 am

  9. Davy on Mon, 8th Apr 2019 5:29 am 

    The petrodollar is no longer relevant but some still choose to act like it is. Global trade and FX movement dwarfs the petrodollar trade. It is mostly emotional and lack of education that keeps people hanging on to this stale anti-Americanism.

  10. Davy Sock Puppet on Mon, 8th Apr 2019 6:49 am 

    JuanP sock on Mon, 8th Apr 2019 5:24 am

  11. Davy on Mon, 8th Apr 2019 6:50 am 

    DavyTurd birds of a feather flock together aka my fascination with all things JuanP.

    Why do I do this? Please will SOMEONE help me? I can offer free room & board in the chicken coup PLUS unlimited conspiracy theory banter.

  12. Davy on Mon, 8th Apr 2019 6:51 am 

    I am REAL GREEN.

    All the rest of you are FAKE GREEN libtards.

  13. Not Davy on Mon, 8th Apr 2019 7:02 am 

    These are juanp postings

    Davy Sock Puppet on Mon, 8th Apr 2019 6:49 am
    Davy on Mon, 8th Apr 2019 6:50 am
    Davy on Mon, 8th Apr 2019 6:51 am

  14. Davy on Mon, 8th Apr 2019 7:05 am 

    JuanP, you are a joke, you realize that don’t you? LOL. Probably not you think you are on a crusade in that lunatic mind. I love seeing you squirm. What does it feel like to be on the chain gang getting your mentally ill and obsessive personality yanked around?

  15. Shortend on Mon, 8th Apr 2019 8:17 am 

    Sure they are! Make MY DAY aoles!
    Saddam Hussein actually did that and found himself hiding in a dugout hole in the ground and later hung to die. Let that be a warning to the House of Said…
    Not accept Dollars!? Henry Kissenger is still alive and well. Call him up and he’ll tell you what will happen next

  16. Davy on Mon, 8th Apr 2019 9:08 am 

    Sorry y’all. I’m having a real hard time dealing with my JuanP obsession. Please ignore my dumbassedness.

  17. Not Davy on Mon, 8th Apr 2019 9:17 am 

    JuanP posted this

    Davy on Mon, 8th Apr 2019 9:08 am

  18. Davy on Mon, 8th Apr 2019 9:19 am 

    From my lips to God’s ears:

    “They need to discuss the Clinton Crime families ties to pedophiles and all the trips down to the private Islands for sex. Pizza gate and all the Podesta evilness should be investigated. The more one studies the Clintons, Podesta and Weiner the more we learn there were disgusting things happening among these people. They thought they were untouchables and above the law. You know they were going to evil places corruption takes people. The corruption at the top on both sides must be cleaned up.”

  19. Davy on Mon, 8th Apr 2019 9:27 am 

    Ooops, I made a big boo-boo.

    “Trump is a fox with effective leadership under him now. He has surrounded himself with insiders who may be embracing his vision of nationalism. He has effective generals who know counterinsurgency and this will allow Trump to quickly achieve victory in Afghanistan.”

  20. Not Davy on Mon, 8th Apr 2019 9:44 am 

    JuanP posted these two comments

    Davy on Mon, 8th Apr 2019 9:19 am
    Davy on Mon, 8th Apr 2019 9:27 am

  21. Not JuanP on Mon, 8th Apr 2019 10:29 am 

    JuanP did not post these two comments. Davy is lying again.

    Davy on Mon, 8th Apr 2019 9:19 am
    Davy on Mon, 8th Apr 2019 9:27 am

  22. Not JuanP on Mon, 8th Apr 2019 10:32 am 

    JuanP did not post this. More Davy lies.

    Davy on Mon, 8th Apr 2019 9:08 am

  23. Inquiring Minds Want to Know on Mon, 8th Apr 2019 1:34 pm 

    Is Davy denying he made the statements above?

  24. More JuanP sock puppets on Mon, 8th Apr 2019 2:51 pm 

    This is a JuanP posting

    Inquiring Minds Want to Know on Mon, 8th Apr 2019 1:34 pm

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