{"id":90523,"date":"2016-05-30T07:31:07","date_gmt":"2016-05-30T11:31:07","guid":{"rendered":"http:\/\/countingpips.com\/?p=90523"},"modified":"2016-05-30T07:31:07","modified_gmt":"2016-05-30T11:31:07","slug":"a-u-s-saudi-breakup-threatens-the-demise-of-the-petrodollar","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex\/2016\/05\/a-u-s-saudi-breakup-threatens-the-demise-of-the-petrodollar\/","title":{"rendered":"A U.S.-Saudi Breakup Threatens the Demise of the Petrodollar"},"content":{"rendered":"
May 30, 2016<\/div>
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By WallStreetDaily.com<\/u><\/a> \"A<\/p>\n

There are, perhaps, fewer more important\u2013 or more delicate \u2013 relationships between countries than the one between the United States and Saudi Arabia.<\/p>\n

The very reason the U.S. dollar is the world\u2019s reserve currency dates back to a deal struck in 1971 between Secretary of State Henry Kissinger and the Saudis, during which the petrodollar was brought into existence.<\/p>\n

The U.S. promised to always protect the House of Saud \u2013 militarily. In exchange, the Saudis would only accept dollars for their oil. Under Saudi pressure, all of OPEC soon followed suit.<\/p>\n

This meant every <\/em>nation on the planet needed dollars if they wanted oil.<\/p>\n

Currently, however, this crucial relationship is arguably at its least stable since the birth of the petrodollar.<\/p>

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This discontent was blatantly obvious during President Obama\u2019s recent visit to Saudi Arabia.<\/p>\n

Despite tradition dictating that government leaders show their respect for visiting foreign diplomats \u2013 with the U.S. President being the most revered in the world \u2013 Obama was not greeted at the airport by Saudi Arabia\u2019s King Salman<\/a>.<\/p>\n

Further, Saudi TV and media pretty much ignored his visit which would, anywhere else, have been great cause for publicity and excitement.<\/p>\n

This diplomatic slight was likely the result of the President having referred to the Saudis as \u201cfree-riders\u201d in an interview with The Atlantic<\/em> in March.<\/p>\n

Dangerous Politics<\/h2>\n

The tension between the two countries further increased recently, thanks to the passing of a bill by the Senate \u2013 the Justice Against Sponsors of Terrorism Act (JASTA) \u2013 which would allows the families of the victims of 9\/11 to sue Saudi Arabia, pending the verdict as to whether any of the country\u2019s officials were involved in the 2001 terrorist attacks.<\/p>\n

This means, if even a single low-ranking government clerk is found to have been involved, Saudi Arabia could be sued by each and every American family that lost someone that day.<\/p>\n

While there is a loophole that the Secretary of State may only engage \u201cin good faith discussions\u201d with the defendant concerning the resolution of claims to satisfy the law, Saudi Arabia stands to lose a significant sum of money in compensation for pain and suffering \u2013 not to mention the stain on the country\u2019s reputation on an international scale.<\/p>\n

The Saudis are fuming hotter than the sands in the Arabian Desert on a sultry summer day.<\/p>\n

Between Obama\u2019s remarks and the potential legal trouble, Saudi Arabia is losing its faith in its bond with the U.S.A.<\/p>\n

Another key part of that distrust stems from the U.S. lifting sanctions against its rival, Iran.<\/p>\n

Further, Saudi Arabian bigwigs feel that the U.S. did virtually nothing to save its long-time Sunni partner, Hosni Mubarak \u2013 the former President of Egypt who was forcibly removed from office and subsequently convicted of corruption in 2015. This has given the Saudis cause to wonder whether they\u2019re the next Sunni regime to be dumped by the U.S.<\/p>\n

It is, however, the 9\/11 bill that has been causing the most turmoil lately.<\/p>\n

As soon as it became international news, the Saudi media had a field day. One daily Saudi newspaper, Okaz<\/em>, blared the headline: \u201cCongress\u2019 Satanic Deed Opens the Gates of Hell for the World\u2019s Largest Country.\u201d You don\u2019t even have to read between the lines to see how the nation feels about the United States.<\/p>\n

Although the headline certainly over-simplified a truly complex issue, the article made a valid point. If this bill is signed into law, what\u2019s to stop other countries from suing the United States for damages and death caused by the U.S. military? Or even to stop other countries from using this same legal action against one another?<\/p>\n

The Justice Against Sponsors of Terrorism Act is, in effect, a Pandora\u2019s Box. Tit-for-tat lawsuits will likely fly back and forth across the globe soon.<\/p>\n

Future Black Swans<\/h2>\n

Politics aside, it\u2019s crucial to take a look at possible implications of this growing gulf between the U.S. and Saudi Arabia \u2013 especially where the financial markets are concerned.<\/p>\n

Everyone, including investors, ought to quickly come to grips with the fact that the United States is dealing with a brand new Saudi Arabian regime.<\/p>\n

As I detailed<\/a> previously, the keys to the Kingdom are in the hands of 30-year old Deputy Crown Prince Mohammed bin Salman.<\/p>\n

The man known to some as MbS, is a no-BS kind of leader. His authoritative style varies in many ways from those of his predecessors, but, more than anything else, he has no fear of the U.S. This sets him apart from most Saudi leaders.<\/p>\n

For MbS, the \u201cplaybook\u201d is open. He has made it amply clear that he\u2019s not going to shy away from conflict with the U.S.<\/p>\n

He is not, however, stark, raving mad, and knows better than to wage a physical war against the most powerful country on the planet. Instead, his options for action are what the financial markets refer to as \u201cblack swan\u201d events.<\/p>\n

The first battleground for which would be within the oil markets.<\/p>\n

The Saudis have already completed Stage 1 in their oil strategy \u2013 driving prices down, and hurting certain producers such as U.S. shale.<\/p>\n

Now Stage 2 is underway. The country\u2019s rig count is up 45% and counting, over the past two years.<\/p>\n

The ultimate goal is to lift Saudi production capacity from 12 million barrels a day to 20 million barrels a day in the shortest time possible. The end game is to flood the market with so much oil that even Iran would struggle to maintain numbers as well as exports.<\/p>\n

Ultimately, MbS hopes U.S. oil players will drown in the flood.<\/p>\n

Oil market participants think MbS is bluffing. Hindsight is, of course, 20\/20. But only time will tell.<\/p>\n

The Saudis may also move to break the bond between the dollar and the Saudi riyal. That bond has been set at 3.75 riyal to the dollar since 1986.<\/p>\n

A riyal devaluation may be MbS and the Saudis\u2019 big move towards the end of the petrodollar.<\/p>\n

China, Russia, and India, among others, are urging an end to the \u201chegemon\u201d dominance of the U.S. dollar in the international monetary system \u2013 particularly with regard to the pricing of commodities. They now have a sympathetic ear in an unhappy Saudi Arabia, the only country who can effectively put an end to dollar dominance.<\/p>\n

For the United States, this would be a big change. The global economy would have to find its footing with another currency.<\/p>\n

China is waiting in line \u2013 so that could be the petro-yuan. But let\u2019s hope it doesn\u2019t come to that.<\/p>\n

The end of the petrodollar system would tank the stock market and affect the U.S. standard of living.<\/p>\n

So, thanks to our politicians kicking sand into the face of Saudi leadership that\u2019s no longer afraid of standing up to the United States, after all these years \u2013 the death of the petrodollar is now a very real possibility.<\/p>\n

Good investing,<\/p>\n

Tim Maverick<\/p>\n

The post A U.S.-Saudi Breakup Threatens the Demise of the Petrodollar<\/a> appeared first on Wall Street Daily<\/a>.<\/p>\n

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 <\/p>\n","protected":false},"excerpt":{"rendered":"

By WallStreetDaily.com There are, perhaps, fewer more important\u2013 or more delicate \u2013 relationships between countries than the one between the United States and Saudi Arabia. The very reason the U.S. dollar is the world\u2019s reserve currency dates back to a deal struck in 1971 between Secretary of State Henry Kissinger and the Saudis, during which […]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-90523","post","type-post","status-publish","format-standard","hentry","no-post-thumbnail"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/90523","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/comments?post=90523"}],"version-history":[{"count":3,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/90523\/revisions"}],"predecessor-version":[{"id":90537,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/90523\/revisions\/90537"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/media?parent=90523"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/categories?post=90523"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/tags?post=90523"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}