Saudi Arabia has been a close ally of the United States since the 1930s. We have had a long fruitful relationship based on the supply of oil, despite vast cultural differences.
Saudi Arabia has elected to stay “neutral” in the Russia Ukraine war according to the map below.
But let’s look at the indirect moves being made by Russia, in partnership with China. You may know that most oil agreements are specified in U.S. currency, known as the petro-dollar. This is a huge advantage in maintaining the strength of the dollar.
A major goal for quite a while has been to remove the petro-dollar from the oil industry. Russia has said they do not want to sell to its enemies, in this case, countries with sanctions against them, so they are using the opportunity to bypass the petro-dollar using Rubles (a currency that is often controlled by the Russian government, and not readily convertible to other currencies). Russia has already agreed to sell oil to China in Yuan (another non-convertible currency). Slovakia and Hungary have agreed to buy oil in Rubles. Venezuela will soon be on board.
What if Saudi Arabia joins Russia, China and others to abandon the petro-dollar? Since Saudi Arabia is a major producer of oil to the west. If they abandon the petro-dollar, then there will be a huge excess of dollars in the world. The strength of the dollar would falter, and the U.S. would be beset by a massive round of inflation.
Why might Saudi Arabia do such a thing? And I am not saying at this point that they have, but its odds are certainly not zero.
First of all, sources tell me the Saudis are PISSed at the Biden administration for supporting and making treaties with Iran.
Second, let’s look at the price of oil over the last few years. Under the Obama and Trump administrations, the price of oil fell dramatically. In fact, the income from oil during this time was below the level Saudi Arabia needed to support its bloated socialist economy. At that point, Saudi Arabia had $700 Billion in reserve currency and was burning through $12 million per month. Experts said they would have become unstable at about $200 Billion.
This is more serious than it seems. The Shia population of Saudi Arabia is supported by oil revenues, they live very comfortably. From a religious viewpoint, they have many conflicting views with the Wahabist Saudi government, but they seem content for the moment. If those welfare payments should stop, the Shia would certainly revolt and the Saudi government could fall.
However, notice that since the Biden Administration and the Russian invasion, oil prices have gone sky-high. Saudi Arabia is no longer digging into its currency. It has more than enough income to increase its currency reserves and support its welfare state.
I am betting Saudi Arabia likes this.
And I’m betting that Russia and China would love to cause continued chaos to keep oil prices high. With Saudi Arabia as part of the evil axis, they would have a great deal of control over the world.
Oil and gas production in the world is very delicately balanced. A 1% excess of production means that someone has to store it, which is very expensive. Prices go down very quickly to prevent the need for storage. A 1% deficit in production means that parts of the rest of the world start to shut down. This means that to meet needs countries must dig into reserves or start shutting down aspects of their economies. Prices go up quickly, so that more production is incentivized.
In other words, small changes make huge differences.
While the U.S. produces its own oil and would not be pressured so much, Europe would be subject to easy blackmail. The slightest displeasing of an evil axis that includes Saudi Arabia could result in severe economic disruptions to Europe.
So this is an important concept. And with the ineptitude of the Biden Administration, all bets are off.