For America, Saudi Arabia trying to move away from the mutual deadly embrace is terrifying. President Biden’s faux pas of calling KSA as Pariah apart so many under currents are operating in their once beneficial but at present strained relationship. Dollar for oil was the chief anchor that bound them together originally. That is breaking!
The 1973 Petrodollar agreement between these two countries enshrined inter alia key provisions that were mutually beneficial for both parties. KSA would bill all oil sales in US Dollar in exchange of USA giving armed protection to KSA. The understanding was KSA buys all the weaponry she needs from USA along with establishing military camps within the kingdom. On the part of KSA it would recycle surplus dollar inflow as investments in US Treasuries. Consequently an elaborate oil for security arrangement came into being.
At that time Saudi Arabia faced numerous obstacles in achieving the leader of Muslim faith which was then split between Turkey and Iran. Theologically Turkey leading the Sunni sect and the Persian Shah responsible for the Shia sect. Although KSA has two of the holiest mosques of Islam in Mecca and Medina she cannot project power due to low population and absence of strong armed forces. Hence the petrodollar agreement was a bulwark behind which Saudis can operate somewhat impudently.
There was icing in the cake. Israel would never dare to attack KSA. Contextually USA also felt at ease. The erstwhile oil embargo imposed by oil producing countries subsequent to Israel Egypt war of 1972 would not be repeated. Furthermore, petro dollar agreement neutralises KSA using her oil weapon against buyers chiefly USA led west.
Successive developments in geoeconomics forced the hand of KSA to a rethink the workings of this bilateral relationship. Jamal Khashoggi affair was only a minor irritant while major undercurrents were emerging to surface one after another.
1. China emerged as lead buyer of hydro carbon from KSA beating USA
2. Israel got her wings clipped as a hegemon in Middle East on the face of resurgent Iran providing weapons to Syria & Lebanon militias
3. China facilitated the thaw between KSA & Iran after decades of mutual acrimony
4. Brazen action by USA against Russia by shutting her out from foreign exchange dealings, restraining the use of US Dollar transactions and appropriating Russian dollar reserves in America and the West brought to the fore the question whether US is a reliable partner.
5. On the suggestion by China, Gulf cooperation Council (GCC) willingness to sell oil & gas in non-dollar currencies is agreed in principle.
6. China establishing Shanghai Petroleum & Gas Exchange to transact business in Yuan for GCC is a welcome sign
7. UAE started selling oil & gas in Yuan
Even though there is no public announcement by Saudis regarding the use of non-dollar currencies, America is put on notice that KSA would not hesitate to drop petrodollar scheme. Slowly and steadily Saudis are moving in steps focused in dethroning the US dollar as exclusive currency for oil sale. Geoeconomics dictate that KSA has to diversify holdings of non-dollar currency reserves as well as Gold!
Cheers!
Muthu Ashraff Rajulu
Business Strategist
Mobile: + 94 777 265677
E-mail: cosmicgems@gmail.com
Blog: Business Strategist
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