On October 11, 2022, President Biden gave an interview with Jake Tapper from CNN. Watch the interview here. The main topics of the interview were Russian President Vladimir Putin, Saudi Arabia, economy, the midterms, the investigation of his son Hunter Biden, and his plans to run for reelection. His comments about Saudi Arabia begin around 5:45 in the video.
Last week OPEC+ slashed oil production by 2 million barrels per day. Tapper mentioned two Senate Democrats who have called for the cessation of arms sales to Saudi Arabia and stated that Saudi Arabia has sided with Russia. Tapper then asked President Biden if the U.S. should rethink its relationship with Saudi Arabia. President Biden vowed consequences for Saudi Arabia but refused to say what those consequences would be.
ZeroHedge reported Biden officials called their Saudi counterparts before the OPEC+ decision asking the decision be postponed for one month. U.S. officials warned Saudi leaders “a cut would be viewed as a clear choice by Riyadh to side with Russia in the Ukraine war and that the move would weaken already-waning support in Washington for the kingdom.” Saudi officials dismissed the request and described them as a “political gambit by the Biden administration to avoid bad news ahead of the U.S. midterm elections.” If the request truly happened, as ZeroHedge reported, the optics for the Biden administration are not good. The Biden administration appears concerned about the gas price on election day, but it doesn’t matter after election day.
In this blog, I have repeatedly warned that the Petro Dollar is in jeopardy. If the Petro Dollar agreement collapses, so will everything priced in dollars. Here are a few past articles that warned about the collapse of the Petro Dollar. President Biden's comments are another souring in U.S./Saudi relations. When President Biden was candidate Biden, he said Saudi Arabia should be a pariah for the killing of the journalist Khashoggi in 2018.
What is the Petro Dollar?
The Petro Dollar is the arrangement the U.S. made with Saudi Arabia in 1974. The United States agreed to sell Saudi Arabia cheap military equipment and weapons. Saudi Arabia agreed to keep the oil trade in Dollars. 80% of all global oil trade happens in Dollars. After an oil trade, one party is sitting on too many Dollars. Those Dollars are reinvested into the local infrastructure or U.S. Treasuries or equities. When the excess Dollars are reinvested, it is called Petro Dollar recycling. Petro Dollar recycling is the primary way the U.S. exports its inflation. Petro Dollar recycling allows the government to print money and keep those Dollars outside the U.S. money supply. Since March 2020, the U.S. Dollar supply has increased by 480%. However, the resulting inflation we feel, although very high, only represents about 4% of the monetary expansion. Those Dollars have been exported to other countries. If those Dollars come back, we could experience triple-digit inflation.
What Happens if the Petro Dollar Abruptly Ends?
Suppose countries sit on large quantities of Dollars to make oil transactions. What happens to those trillions of Dollars if the oil trade begins being traded in a different currency? The Dollars will be traded for the new currency, and there will be a large Dollar influx into the market simultaneously. Whenever there is an abundance of a commodity or asset sold simultaneously, the price goes down. It will be a double whammy for the Dollar. The Dollar would lose value against other currencies, and all those Dollars would repatriate into the U.S. The U.S. economy would feel all the inflation we have exported over decades within a few months. It is unlikely that the Petro Dollar agreement would end abruptly because Saudi Arabia and the other OPEC countries are heavily invested in Dollar backed assets like the U.S. stock market and U.S. Treasuries. Instead, we would watch a systematic reduction in the number of oil transactions happening in Dollars and OPEC countries reducing their Dollar backed assets.
Three Reasons to Believe OPEC is Moving Away from the Dollar
1. China and Saudi Arabia are negotiating oil being sold to China in Yuan. China is Saudi Arabia’s largest customer purchasing about 2 million barrels per day. The U.S. only purchases about 500,000 per day. Allowing China to purchase its oil in Yuan would reduce Dollar oil transactions by around 20% daily.
2. Saudi Arabia has applied to join the BRICS nations (Brazil, Russia, India, China, and South Africa). Saudi Arabia’s application came after Iran had already applied, and the member countries spoke highly of the Iranian application. Saudi's BRICS application should have been the biggest story on every news channel, but the U.S. media was silent. It is Saudi Arabia handing divorce papers to the West. Saudi Arabia and Iran are enemies actively fighting a proxy war in Yemen. It is improbable that the BRICS would accept Iran and Saudi Arabia. Still, it is almost a given that one will be accepted. In every way, Saudi Arabia would be more valuable to the BRICS. Saudi Arabia has more oil. It has the loyalties of the other OPEC nations. The Saudis have American weapons and routinely access American intelligence apparatuses. If you were China and Russia and were building a basket of commodity-backed currencies to rival the Dollar, would you choose Saudi Arabia or Iran? OPEC produces 35% of the global oil and is the bonus you get if you choose Saudi Arabia.
Saudi Arabia is the largest global exporter of oil. The U.S. isn't producing anywhere near capacity. The U.S. has the largest oil reserves in the world but doesn’t drill for environmental and political reasons. If the BRICS accepts Saudi Arabia, 8 of the top 10 oil producers would probably be loyal to China and Russia.
3. Saudi Arabia’s official website says Saudi Arabia plans to diversify its economy by 2030. The graphic is the Saudi 2030 plan. 53% of the entire Saudi economy is oil. Almost all of that is traded in Dollars. The Saudi economy has a single point of failure, the Dollar. Diversification aims to mitigate risk and have as many points of failure as possible. The U.S. also has a 2030 plan that all government fleet cars will be electric. The U.S. intends to buy even less oil from Saudi Arabia, and China is willing to buy every additional drop Saudi Arabia sells. For the Saudi economy, there is a tremendous long-term downside risk for the Dollar and not much upside. It makes sense that the Saudis will continually move away from the Dollar and snub U.S. Presidents.
What Does it Mean?
Imagine a man coming into a village and saying there is a storm and everyone needs to prepare. Some people rush to prepare their homes, but most people do nothing. A second man runs into the village holding broken tree limbs, saying the storm is increasing and he found this tree branch destroyed. A few more people prepare, but most do nothing. Third, a man runs into the town, saying violent storm clouds are forming, and it looks like it could be a tornado heading straight at us. A few more people act, but most still do nothing. One of the men asked one of the people who hadn't prepared, "What are you waiting for? This storm is going to be fierce. The sky is red. The air is cold. The evidence is all around you. The storm is going to be bad." The person responds, "when I see the storm myself, then I will do something to prepare." The man said, "that is not preparing; that is reacting."
The Petro Dollar storm will be one of the most rapid inflationary periods ever. It will devastate everything in its path, including every retirement account, investment, and asset priced in Dollars. At this moment, the current splinter in the U.S./Saudi relationship is another man running into the village telling people to prepare. Gold and silver are considered currency agnostic. Currency agnostic means an asset has value in every currency. Gold will still have value, even if the Dollar doesn't. Would a currency-agnostic portfolio be beneficial to shelter your wealth when the Petro Dollar storm arrives?
Will you prepare or react?
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