The Growing Rift With Saudi Arabia Threatens To Severely Damage The Petrodollar

By Michael Snyder
Are You Ready For The Death Of The Petrodollar - Photo By Revisorweb
The number one American export is U.S. dollars.  It is paper currency that is backed up by absolutely nothing, but the rest of the world has been using it to trade with one another and so there is tremendous global demand for our dollars.  The linchpin of this system is the petrodollar.  For decades, if you have wanted to buy oil virtually anywhere in the world you have had to do so with U.S. dollars.  But if one of the biggest oil exporters on the planet, such as Saudi Arabia, decided to start accepting other currencies as payment for oil, the petrodollar monopoly would disintegrate very rapidly.  For years, everyone assumed that nothing like that would happen any time soon, but now Saudi officials are warning of a “major shift” in relations with the United States.  In fact, the Saudis are so upset at the Obama administration that “all options” are reportedly “on the table”.  If it gets to the point where the Saudis decide to make a major move away from the petrodollar monopoly, it will be absolutely catastrophic for the U.S. economy.
The biggest reason why having good relations with Saudi Arabia is so important to the United States is because the petrodollar monopoly will not work without them.  For decades, Washington D.C. has gone to extraordinary lengths to keep the Saudis happy.  But now the Saudis are becoming increasingly frustrated that the U.S. military is not being used to fight their wars for them.  The following is from a recent Daily Mail report

Upset at President Barack Obama’s policies on Iran and Syria, members of Saudi Arabia’s ruling family are threatening a rift with the United States that could take the alliance between Washington and the kingdom to its lowest point in years.
Saudi Arabia’s intelligence chief is vowing that the kingdom will make a ‘major shift’ in relations with the United States to protest perceived American inaction over Syria’s civil war as well as recent U.S. overtures to Iran, a source close to Saudi policy said on Tuesday.
Prince Bandar bin Sultan told European diplomats that the United States had failed to act effectively against Syrian President Bashar al-Assad and the Israeli-Palestinian conflict, was growing closer to Tehran, and had failed to back Saudi support for Bahrain when it crushed an anti-government revolt in 2011, the source said.

Saudi Arabia desperately wants the U.S. military to intervene in the Syrian civil war on the side of the “rebels”.  This has not happened yet, and the Saudis are very upset about that.
Of course the Saudis could always go and fight their own war, but that is not the way that the Saudis do things.
So since the Saudis are not getting their way, they are threatening to punish the U.S. for their inaction.  According to Reuters, the Saudis are saying that “all options are on the table now”…

Saudi Arabia, the world’s biggest oil exporter, ploughs much of its earnings back into U.S. assets. Most of the Saudi central bank’s net foreign assets of $690 billion are thought to be denominated in dollars, much of them in U.S. Treasury bonds.
“All options are on the table now, and for sure there will be some impact,” the Saudi source said.

Sadly, most Americans have absolutely no idea how important all of this is.  If the Saudis break the petrodollar monopoly, it would severely damage the U.S. economy.  For those that do not fully understand the importance of the petrodollar, the following is a good summary of how the petrodollar works from an article by Christopher Doran

In a nutshell, any country that wants to purchase oil from an oil producing country has to do so in U.S. dollars. This is a long standing agreement within all oil exporting nations, aka OPEC, the Organization of Petroleum Exporting Countries. The UK for example, cannot simply buy oil from Saudi Arabia by exchanging British pounds. Instead, the UK must exchange its pounds for U.S. dollars. The major exception at present is, of course, Iran.
This means that every country in the world that imports oil—which is the vast majority of the world’s nations—has to have immense quantities of dollars in reserve. These dollars of course are not hidden under the proverbial national mattress. They are invested. And because they are U.S. dollars, they are invested in U.S. Treasury bills and other interest bearing securities that can be easily converted to purchase dollar-priced commodities like oil. This is what has allowed the U.S. to run up trillions of dollars of debt: the rest of the world simply buys up that debt in the form of U.S. interest bearing securities.

This arrangement works out very well for the United States because we can wildly print money and run up gigantic amounts of debt and the rest of the world gobbles it all up.
In 2012, the United States ran a trade deficit of about $540,000,000,000 with the rest of the planet.  In other words, about half a trillion more dollars left the country than came into the country.  These dollars represent the number one “product” that the U.S. exports.  We make dollars and exchange them for the things that we need.  Major exporting countries (such as Saudi Arabia) take many of those dollars and “invest” them in our debt at ultra-low interest rates.  It is this system that makes our massively inflated standard of living possible.
When this system ends, the era of cheap imports and super low interest rates will be over and the “adjustment” to our standard of living will be excruciatingly painful.
And without a doubt, the day is rapidly approaching when the petrodollar monopoly will end.
Today, Russia is the number one exporter of oil in the world.
China is now the number one importer of oil in the world, and at this point they are actually importing more oil from Saudi Arabia than the United States is.
So why should Russia, China and virtually everyone else continue to be forced to use U.S. dollars to trade oil?
That is a very good question.
In fact, China has been making a whole lot of noise recently about the fact that it is time to start becoming less dependent on the U.S. dollar.  The following comes from a recent CNBC article authored by Michael Pento

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Our addictions to debt and cheap money have finally caused our major international creditors to call for an end to dollar hegemony and to push for a “de-Americanized” world.
China, the largest U.S. creditor with $1.28 trillion in Treasury bonds, recently put out a commentary through the state-run Xinhua news agency stating that, “Such alarming days when the destinies of others are in the hands of a hypocritical nation have to be terminated.”

For much more on all of this, please see my previous article entitled “9 Signs That China Is Making A Move Against The U.S. Dollar“.
But you very rarely hear anything about this on the evening news, and most Americans do not understand these things at all.  The fact that the U.S. produces the de facto reserve currency of the planet is an absolutely massive advantage for us.  According to John Mauldin, this advantage allows us to consume far more wealth than we actually produce…

What that means in practical terms is that the United States can purchase more with its currency than it produces and sells. In theory those accounts should balance. But the world’s reserve currency, for all intent and purposes, becomes a product. The world needs dollars in order to conduct its trade. Today, if someone in Peru wants to buy something from Thailand, they first convert their local currency into US dollars and then purchase the product with those dollars. Those dollars eventually wind up at the Central Bank of Thailand, which includes them in its reserve balance. When someone in Thailand wants to purchase an imported product, their bank accesses those dollars, which may go anywhere in the world that will take the US dollar, which is to say pretty much anywhere.

And as Mauldin went on to explain in that same article, a significant amount of the money that we ship out to the rest of the globe ends up getting reinvested in U.S. government debt…

That privilege allows US citizens to purchase goods and services at prices somewhat lower than those people in the rest of the world must pay. We can produce electronic fiat dollars, and the rest of the world accepts them because they need them to in order to trade with each other. And they do so because they trust the dollar more than they do any other currency that is readily available. You can take those dollars and come to the United States and purchase all manner of goods, including real estate and stocks. Just this week a Chinese company spent $600 million to buy a building in New York City. Such transactions happen all the time.
And there is one other item those dollars are used to pay for: US Treasury bonds. We buy oil and all manner of goods with our electronic dollars, and those dollars typically end up on the reserve balance sheets of other central banks, which buy our government bonds. It’s hard to quantify the exact amount, but these transactions significantly lower the cost of borrowing for the US government. On a $16 trillion debt, every basis point (1/10 of 1%) means a saving of $16 billion annually. So 5 basis points would be $80 billion a year. There are credible estimates that the savings are well in excess of $100 billion a year. Thus, as the debt grows, the savings also grow! That also means the total debt compounds at a lower rate.

Unfortunately, this system only works if the rest of the planet has faith in it, and right now the United States is systematically destroying the faith that the rest of the world has in our financial system.
One way that this is being done is by our reckless accumulation of debt.  The U.S. national debt is now 37 times larger than it was 40 years ago, and we are on pace to accumulate more new debt under the 8 years of the Obama administration than we did under all of the other presidents in U.S. history combined.  The rest of the world is watching this and they are beginning to wonder if we are going to be able to pay them back the money that we owe them.
Quantitative easing is another factor that is severely damaging worldwide faith in the U.S. financial system.  The rest of the globe is watching as the Federal Reserve wildly prints up money and monetizes our debt.  They are beginning to wonder why they should continue to loan us gobs of money at super low interest rates when we are beginning to resemble the Weimar Republic.
The long-term damage that we are doing to the “U.S. brand” far, far outweighs any short-term benefits of quantitative easing.
And as Richard Koo has brilliantly demonstrated, quantitative easing is going to cause long-term interest rates to eventually rise much higher than they normally should have.
What all of this means is that the U.S. government and the Federal Reserve are systematically destroying the financial system that has enabled us to enjoy such a high standard of living for the past several decades.
Yes, the U.S. economy is not doing well at the moment, but we haven’t seen anything yet.  When the monopoly of the petrodollar is broken, it is going to be absolutely devastating.
And as I wrote about the other day, when the next great economic crisis strikes it is going to pull back the curtain and reveal the rot and decay that have been eating away at the social fabric of America for a very long time.
Just check out what happened in Detroit recently.  The new police chief was almost carjacked while he was sitting in a clearly marked police vehicle…

Just four months on the job, Detroit’s new police chief got an early taste of the city’s hardscrabble streets.
While in his patrol car at an intersection on Jefferson two weeks ago, Police Chief James Craig was nearly carjacked, police spokeswoman Kelly Miner confirmed today.
Craig said he was in a marked police car with mounted lights when a man quickly tried to approach the side of his car. Craig, who became police chief in June, retold the story Monday during a program designed to crack down on carjackings.

Isn’t that crazy?
These days, the criminals are not even afraid to go after the police while they are sitting in their own vehicles.
And this is just the beginning.  Things are going to get much, much worse than this.
So let us hope that this period of relative stability that we are enjoying right now will last for as long as possible.
The times ahead are going to be extremely challenging, and I hope that you are getting ready for them.


34 thoughts on “The Growing Rift With Saudi Arabia Threatens To Severely Damage The Petrodollar”

  1. The House of Saud is threatening the ‘House of Israel’ in New York. Who do you think will win? Answer: Not the american people. When Syria falls, whither Iran? And what sayeth you- Russia? Brazil? Aw c’mon, you know where you are. It’s freedom vs. “The Empire”. Who do you think will win? Send your comments to….foo.

          • The fictional history is the holohoax and the 6 million Jews that supposedly died. Talk about fiction. The Holocaust is the biggest lie of the century, but one of the best ideas!

          • Where do you people get your “facts”? From anti-semitic propaganda rags? You sure don’t get it from eyewitness or first-source historical documentation which the Nazi’s had plenty of! Have you ever been to the camps? I have. Have you ever talked to non-Jews who were there (including Poles and Germans)? I have. To even suggest it never happened is equal to suggesting World War 2 never happened. You people are %#*$@& delusional. You want to believe it and so you do. It’s really just that simple. Do you deny that the Polish officers were executed by the NKVD in the Katyn Forest? Do you deny that Pol Pot murdered millions of his people? Do you deny that the Sioux dancers were killed at Wounded Knee? Do you deny that Japanese Americans were interred in camps in the 1940’s? Do you deny any of events? Do you ? because there is more evidence and documentation for the German holocaust than for any of these other events that I’m willing to bet you have no trouble accepting with zero research. Hypocrites all of you! You want to know what the biggest lie of the century is? That you have a functioning brain.

          • Where do you get your facts, shithead? The holohoax is a complete lie. That’s why the kikes have to put out all those stupid holohoax movies!

          • Tossing childish insults around is no replacement for solid research and facts. Nice try, but you don’t get a pass just because you are an obnoxious bigot. You haven’t answered my questions which you should have no problem answering if you have evidence instead of propaganda slogans. But then, that’s all you do have: hate, illogic, bigotry and murder in your heart. You are sick man and you need professional help. Get it.

    • Wrong! Both House of Saud and House of Zion are on the same boat. Both want Syria decimated and Iran extinct. Both are racist, are are run by religious zealots, and want US to fight their wars.

  2. Let the Saudis shout, with the gnashing of teeth all they want. It’s only a few phone calls, a few rumors, and then there will be a HUGE uprising in their country… of course the US would have to get everyone out of the bases there, if only to “keep order” in the UAE, by gathering up all of the House of Saud, and “protecting” them under house arrest while a new government that RESPECTS the $4 Billion in US aid, and would like some of the monies sent abroad by the wahabbi Sauds to stay in the country.
    The kings can always be “served up” to their people – hot or cold.

    • Smart thinking Ann… The wildcard though of course, is the New & Improved Soviet Union… Regardless of our supposed military superiority, no one in the U.S. political structure has the balls to confront comrade Putin. No One. And comrade Putin is patiently, but diligently working to make sure the undermining of our own doing, continues apace… We are being systematically ring-fenced by Russia, China and other countries who have had enough of U.S. Very few know this, and even fewer Believe it. They’ve been fed the line that we are #1, forever and always. It is going to be a very sober awakening for the American public when they find out – in more ways than one, that we are Not.

  3. “Saudi Arabia desperately wants the U.S. military to intervene in the Syrian civil war on the side of the “rebels”. This has not happened yet, and the Saudis are very upset about that.”—Not nearly as upset as Israel…and that’s who really counts.

    • Wrong. It’s the Saudi’s that count most since they and the Chinese are single-0handedly supporting this petrodollar system. While Israel has traditional ties to the US and has been a long-time ally in the mid-east since the Cold War, that relationship is going cold. Obama and his gang realize that kissing Saudi’s ass is critical to keeping the game going. But the Chinese are on to the fact that the game is changing and they want to be the new petrodollar. Your barely concealed antisemitism can’t change reality.

        • Actually I have 10 Bibles. And I’ve read them all. I also have a masters degree in History – my field of study being classical history. So you’re wrong on at least two counts and probably wrong on every other idea that spews from your arrogant and ignorant head. You made a claim that is simply false. Now you attack the messenger who categorically denies your claim instead of providing evidence. Typical. You just hate Jews. You don’t need evidence.

          • What do you do with your bibles, use them for coasters? Your “degrees” in history are worthless if learned in US universities. Fabricated and skewed. “”Falsification of history has done more to impede human development than any single thing known to mankind”–Rousseau That you have swallowed the official narrative is clear. Enjoy your stupidity.

          • Good grief. What are your credentials, if I may ask? There is no “official” narrative. There are only facts and it’s clear that no amount of those will change your mind because you’ve already decided what you want to believe. So be it. Like all fools you think you are a genius even if you are a dolt. You are beyond help and a waste of my time.

          • Judging by your pic, if that’s you, I’m about twice your age. I’m an infantry veteran from Vietnam. You need to experience more firsthand before you claim to know it all. You’re certainly clueless about the content of the Bible and of those that had Christ crucified. I’m guessing you’re a big fan of Osteen and Hagey. Both “false teachers”.(They are known as Christian Zionists). You should look up the history of the current occupiers of Palestine. They are Khazars.(jews by conversion in the 8th century) I’ll leave you to figure out the rest of the story on your own.

          • You couldn’t be more wrong. I too am a veteran: Air Force 1979-1983 Security Police. Spent a short time in Grenada during the invasion there. Took a round in my thigh and have a medal to prove it. And I’m 53 – not so young. But this has nothing to do with anything. You have no idea what I’ve experienced in life so stop the presumption. I’ve been a Christian since 1980. I know my Bible very VERY well, and I don’t watch Osteen or Hagee. I also happen to be a Zionist and proud of it. I used to be a neo-Nazi Jew-hater like yourself back in the day. I know all about the Khazars. Nothing new there. Then I educated myself and became a degreed historian and found out first hand by going to Poland and Russia and Lithuania and speaking to people first hand and seeing the places where the holocaust happened and I found out that it was all true. This BS revisionist occultist history being spewed by racists like yourself is absolute drivel. You would do yourself a huge favor by taking an unbiased look at the facts. God will hold you accountable one day for spreading lies. Don’t kid yourself. And as far as I;m concerned this conversation is over. I really do have better things to do with my time than argue with people who have shut their minds.

          • You might read Revelation 3:9 and research the history of the moneychangers, ya know the guys Christ had a rub with in the temple. Same guys today

  4. All countries print “fiat” currencies, nobody’s currency is backed by anything and none of the national “debt” that enslaves us all is real either. Most treasuries or savings bonds are bought by commercial banks that use fractional reserve lending to print money out of thin air, buying national debt with nothing and then charging the country principal plus interest which must be paid back with real value. It is de facto legal counterfeiting and the entire planet loses enormous sums of productive potential by having to pay back these fraudulent debts created and backed by nothing from commercial banks. The solution to the debt crisis is for nations to simply forgive all debts and to write off commercial bank debts while creating new regulations that curtails banks’ fractional reserve ratios to something around 2:1 rather than the unlimited amount they enjoy now. Banks will fail, and that’s fine, there are plenty of others waiting in line to take their place. With no national debts to pay down, there is no need for an income tax–freeing up enormous sums of capital from the consumer side as well.
    Saudi’s oil reserves are declining, their power and relevance can only decline while Iraq and Iran’s can only increase. The U.S. would do well to make strong commercial partners of those countries, help stabilize them and put them on a path to sound development and it will stabilize the region. The messianic jewish regime in Israel will certainly gnash its teeth at that prospect and probably threaten the world with more nuclear blackmail, but it’ll be an exercise in futility and they’ll know it.
    However, the world’s material resources are still finite so the U.S. will probably still manage to bankrupt itself thanks to its obsession with playing the role of global policeman and insisting on continuing to expend ridiculous sums of money on a bloated and utterly useless military. A far better policy would be one of global disarmament and reductions in wasteful military spending across the globe which could be used for education, sanitation, health and development where its most needed. Not only would it stimulate the economy and eradicate poverty, it would mean the end of terrorism.

    • What a such dreamer! The useless military is what guarantee your piece and security! And it’s proved it is not the poverty that breads terror: Bin laden was not a poor boy, and the terror’s engine is not banish poverty, but either, religious and military dominance. Sorry!


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