It is a good bet that if something is not in the daily headlines of the major media, then it is probably very important. Under the radar has been the dramatic, volatile political turmoil in Saudi Arabia. The country’s strategic relationship with the United States has a significant effect on the price of oil, energy, and the primacy of the dollar in global oil markets. Upheaval can impact the dollar in significant ways, and dramatic, substantial volatility can risk the reserve currency status of the US greenback.
We have talked about the issue of dollar primacy before. Once backed by gold, the dollar became the world’s reserve, singular currency of value after World War II (although it was widely in use prior to the war). When we went off the gold standard in 1971, the dollar remained the world’s reserve currency for the principal reason that no one could challenge our cultural, financial, and military superiority.
Things have changed. While gradual changes in the global economic landscape were inevitable, from a myriad of factors, it has been the previous 8 years which has radically and fundamentally transformed our leading position in the world. Lacking the physical dominance on the global landscape, why would other countries feel compelled to use the dollar as a reserve currency?
Nonetheless, replacing the main unit of exchange in over 80% of all global economic transactions was not going to happen easily, or overnight. Hence, the dollar remains “King Dollar” … for now.
What could hasten changes in the global foreign exchange markets, and central bank usage of dollars as the primary global currency is a massive upheaval in energy markets. While the U.S. has become mostly energy independent (thanks to free-market capitalism, innovation, and fracking), and has almost become a net “exporter” of energy in less than a decade, most of the world remains dependent on energy supplies from the Middle East. Upheaval in those markets can impact pricing and therefore global economics.
And that is what makes the Kingdom of Saudi Arabia’s most recent internal political struggles so important. Consider these recent events:
1) The transfer of power went to a younger, less experienced son as opposed to an older cousin or brother of the current King – King Salman.
2) His son – Mohammed Bin Salman – is 32 years old and a reformer and is currently titled as the Crown Prince.
3) For the first time in decades, the power struggle has been public and nasty, with dozens of relatives, brothers, uncles, cousins, etc. arrested for “corruption” … bank accounts seized, wives and children under house arrest … the new leader plans on clearing out all potential threats to his rule.
4) His expected reforms have riled the conservative Wahhabi’s and Sunni Mosque extremists, splitting the country and the public in two.
The U.S. and Saudi Arabia have been strategic partners for almost a century, and bound the relationship further with not so secret, but off-the-record, agreements between then-President Nixon and King Faisal shortly after the Yom Kipper War and the first OPEC oil embargo – which provided that the U.S. would guarantee Saudi security and oil transport security in the gulf, in exchange for cheap supplies of oil and purchases of U.S. Treasuries. Oil is traded in dollars – going off the gold standard in 1971, this helped ensure dollar stability as it floated against other currencies. Liquidity and stability, backed by U.S. military might, kept the dollar as the world’s reserve currency even as it was no longer backed by gold.
The pillar of U.S. military might has been shaken and dollar liquidity was questioned with the 2008 financial crisis. Therefore, more than ever, dollar stability depends in no small part of stable energy markets.
BUT … the “palace intrigue” in Saudi Arabia, on the surface, can have some appeal. What is the good and the bad of Saudi politics?
What Good Can Come From Saudi Political Intrigue?
- Reform and modernization represent a slight shift in values and beliefs. Any change in the treatment of women, in diversifying their economy, and helping to stamp our radicalization in the Muslim faith are welcome and needed changes in Saudi society. It also makes it easier for the U.S. to do business with the very home of Islam making an effort to modernize their society. The anti-terrorism effort should get a boost as well.
- Reduces stress on Israel. Saudi money and regional influence directly impact the Israeli-Palestinian conflict. Sensing a greater threat in Iran, the Saudi’s (along with the Egyptians and Jordanians) have moved closer to Israel in regional political and military coordination. That is a good thing for both Israel’s tactical defenses and U.S. strategic interests.
- They are the new bulwark against Iranian hegemony. Iraq was the original barrier to Iranian influence in the Middle East. When we destroyed Iraq, we were supposed to serve as the guarantor by remaining there. With Obama’s withdrawal right when we had won the war, Iraq fell apart, leaving Iran as the most powerful and influential player. Combined with Obama’s Iran deal, giving billions to the mullahs, and not preventing Iran from becoming a nuclear state, our allies in the region rightfully determined we could not be counted on. However, this has forced the Saudi’s to devise their own strategy in combatting the Iranians, and that is a good thing if they can pull it off without our help. Less blood and treasure will be spent by the U.S. if the people who actually live there take up their own defense.
What Bad Can Come From Saudi Political Intrigue, and How Could it Impact Dollar “Reserve Currency” Status?
- U.S. withdrawal has moved the Saudi’s closer to Russia and China China from an economic perspective, and Russia from a military perspective. The Saudi’s were infuriated at Obama’s Iran deal – rightfully knowing it would empower their Shia rivals. They also had momentum and believed they could topple the brutal Assad regime in Syria. But that momentum was reversed with Obama’s failure to enforce the “line in the sand” when the Syrians used poison gas on their own population. This was again rightfully perceived as weakness, and gave the Russians the belief they could intervene without US pushback…. which they did and we did not. The result has been a multi-year, multi-front war pushing Sunni Saudi Arabia back, and empowering Shia Iran to their detriment. An Iranian land bridge now reaches all the way to the Mediterranean and further empowers the Hezbollah terror group and threatens Israel. US foreign policy in the region under Obama has been nothing short of catastrophically bad for everyone, and Saudi Arabia has borne the brunt of the suffering. No wonder they are seeking new, powerful friends to help secure their defense. The Russians are on the side of Iran, but more than willing to play the regional security guarantor role that we have given up. The larger plan for Russia and Iran is the removal of the U.S. from the region, and removal of the dollar as the primary currency in energy trades.
- China has the same objective – end dollar primacy. China has the same objective – end the role of the dollar as the global reserve currency. This gives enormous economic benefit and leverage to the United States, and China believes that role is no longer deserved. Saudi Arabia fears a powerful enemy in Iran, destabilized borders with Syria and Iraq, and their own potential internal strife with their reform and modernization plans (Iran is funding destabilization efforts in Saudi Arabia as well – seeing an opportunity). The U.S. is no longer a reliable, stabilizing ally, and therefore – in steps China. This past year, deals have been signed worth over $65 billion; oil deals between Saudi ARAMCO and China’s state industrial company Norinco have been signed; it was a direct signal to the entire region: Saudi Arabia was moving away from U.S. dependence.
- If Oil trades in other currencies besides the dollar, that is the last pillar of dollar dominance in global markets. All 3 countries – Russia as a regional power with global military reach … China as a global economic power who has nukes but not the ability to forward deploy, yet … and Iran, a regional player seeking regional hegemony and eventually to play on the global stage … ALL THREE want the following: (A) control of energy markets; (B) removal of the U.S. from the region; and, (C) replace the dollar as the currency used for trading in the energy market, and in turn, drive it from its position as the global reserve currency. All for different reasons – China wants to rival and eventually surpass the U.S. as the pre-eminent nation on Earth … Russia wants to secure its borders and regain past glory … Iran has ideological beliefs in destroying the Jews and the Great Satan (the U.S.)… to accomplish these tasks, the easiest way is through economic warfare (actual military conflict would result in global destruction and/or US victory, so that is not a current option). The easiest way to succeed in economic warfare is through downgrading the value of the dollar, eventually replacing it in energy markets, which would be the stepping stone to a new global reserve currency. Remember – people use the dollar because of its safety …first backed by gold, that protection has been gone for 46 years……then backed by our power, and that’s been eroded the last 8 years. These efforts start in Saudi Arabia – the kingdom which controls OPEC, controls energy prices, and who feels we have left them hanging alone in a very dangerous part of the world.
Dramatic changes in our economic way of life may or may not be coming our way, but regardless, the information we do have suggests a protection strategy for your money is a safer way to approach the political and economic unknown. Call now to learn how you can have your money protected from stock market losses and earning a reasonable rate of return! 877-912-1919