I was doing research and writing about the Petrodollar for a client when I ran into the chart above. This chart made me think deeply.
The chart above shows the historic correlation between the US Dollar and WTI Crude Oil Price. If you notice above till the mid-2010s oil prices and the dollar had an inverse correlation. Meaning that as oil prices went up the dollar went down. Now notice what happens right after 2015. As oil prices slowly went up so did the Dollar. This trend continued with the exception being 2020 when oil prices historically fell thanks to oil oversupply at the time. After 2020 the dollar and oil have both gone up together. So why is this?
The US before 2015 was a net energy exporter. Meaning that the US faced increased trade deficits when the price of oil went up. This meant that the dollar declined when oil prices increased. But in the mid-2010s the dynamics of global energy started to change. The shale oil revolution made the US the top oil exporter, overtaking OPEC. This meant that now high oil prices mean more revenues to Uncle Sam. Therefore, as oil prices went up so did the Dollar. After 2020 both oil and the Dollar have together risen sharply. Oil has risen sharply due to the Russia-Ukraine conflict and inflation. The Dollar has risen mainly due to excess demand for Dollars and Dollar-denominated assets and investors flocking to the Dollar for safety. But is the so-called shale boom another stab into the PetroDollar?
In 2015 the US changed the world oil markets. Congress in 2015 repealed the crude oil export ban enacted in 1975. This export ban was enacted in response to the OPEC oil embargo. As hydraulic fracking increased the US started to become a net oil producer. US energy companies wanted to join the global commodity boom (the commodity boom happened from 2000 to 2014) and sell oil throughout the world (why do just the Saudis and Russians get to have all the fun)?
Oil and gas companies started lobbying congress to repeal the oil ban so that these companies can sell their oil around the world. Many prominent think tanks and trade associations like the American Petroleum Institute supported the repeal. The reasons for this support included increased job creation, US oil reaching global markets, increase tax revenue, and oil prices going down which will help the American consumer. This move to promote American shale was also geopolitical. Releasing US shale oil into the global market heavily dropped the price of oil. This oil price drop was not only due to shale. Increased tensions between Saudi Arabia and Iran led the Kingdom to increase the oil supply and hurt the Iranian economy. Overall the Shale “revolution” and increase oil supply by the Saudis significantly lowered the price of oil. This had adverse effects on the Russian economy. But in the quest for energy independence, joining the global oil market, and hurting Russia, shale oil may have unintended consequences for the US Dollar.
By releasing shale oil to the global markets instead of being a partner the US became a rival in terms of global energy markets. Now the Saudis had to compete with a new player in the game, American shale oil producers. The rise of Shale also made US energy independent. This meant that the Saudis lost a major customer, the mighty US economic machine. So the Saudis not only lost a major customer but this customer turned into a rival. But as Saudi Arabia lost one major customer another it gained another: The Middle Kingdom.
China has become the largest customer of Saudi oil. The Saudis are also increasingly collaborating with China on energy megaprojects. One such project is a joint project between Saudi Aramco and China to build a large integrated downstream business across the country. The goal of this megaproject is for Aramco to provide everything ranging from oil to natural gas for the purposes of refining, marketing, petrochemicals, and lubricants. Aramco’s SVP for Downstream Mohammad Y. Al-Qattani announced this plan in Shandong, China. Shandong, China is home to China’s largest oil refinery where 26% of the country’s oil is refined. The majority of Saudi Arabia’s oil is refined here. According to Al-Qattani, Aramco also wants to work on other green projects in partnership with China. Of course, the Saudis have a lot to be grateful to the Chinese. When MbS was floating Aramco’s initial IPO, it was the Chinese who went ahead and purchased 5% of the Saudi oil company, thus justifying the company’s $2 trillion valuation before its first IPO. For Saudi Arabia, MbS also understands that the country needs to be prepared for a post-oil future. This is why the Kingdom wants to be a leader in EV, green energy, and emerging technology. To do this, MbS has created a massive long-term project called Vision 2030. MbS has also shown interest in integrating Vision 2030 with China’s Belt and Road. Over the coming years, to be a leader in a “post-Oil” world, MbS needs to look east. As China becomes an important trade, economic, and technological partner and the Saudis want China to buy more oil, China holds a lot of the cards in the Saudi - China relationship. No doubt the Chinese arm twisted the Saudis and told the Kingdom that in return for China buying Saudi crude oil the Saudis must price their oil in Yuan instead of the Dollar. This will give a leg up to the Chinese because the PBOC (People’s Bank of China) can just print Yuan to buy oil instead of selling its reserves to buy more Dollars from the open market to purchase Saudi oil. This is also a stab into the “PetroDollar” heart.
The Saudis have a lot to be thankful for the Russians as well. In 2016 OPEC became OPEC+ by inviting the Russians to the oil cartel. Together Russia and OPEC started pumping huge amounts of oil into the market to attack US shale producers. This led to a massive decline in oil prices in 2020, which affected US shale heavily because super-low oil prices will hurt the bottom line of these shale companies. Therefore, with China being Saudi’s number one customer and Russia partnering with OPEC, both Russia and China became partners to the Kingdom while the US became a rival. For this reason, the Saudis are now wondering why they need to prop up the US Dollar by pricing oil in Dollars, thus supporting the US economy and US oil producers.
Shale oil is not just the reason why the PetroDollar is under attack. The whole foundation of the Petrodollar is the US guaranteeing the security of gulf oil. This was succeeded by the Carter doctrine, where according to President Jimmy Carter’s former national security advisor Zbigniew Brzezinski, to maintain American hegemony the US must maintain primacy over the Eurasian landmass. To maintain this hegemony, the US must protect the Middle East/West Asia at all costs and not allow any other power to “take control” of the region. But according to Mohammed Soliman of the Middle East Institute, the Carter Doctrine died in 2019, when the US failed to retaliate against the Iranians when Iran attacked Saudi oil fields. In this case, the Saudis see the US as not keeping its part of the PetroDollar deal, which is protecting Saudi and Gulf oil. The Saudis have also been unhappy with the Obama administration reaching out to Iran and working with Russia, China, France, UK, and Germany on the Iran Deal and attempting to normalize the relationship between the US and Iran. Let’s also not forget the macro aspect of Saudi’s pivot to the east. As we had the greatest money printing decade (aka QE) many US Treasury bill holders have seen the value of their dollar holdings decline. So for the Saudis, instead of seeing their reserves decline in value thanks to Fed money printing the Saudis want to diversify their reserves into emerging tech, renewables, EVs, and buildings the country’s infrastructure (and let’s not forget golf tournaments). As of 2021, the Kingdom’s UST holdings have gone down to a four-year low.
Also, President Biden’s visit to the Kingdom was seen as fruitless by many international relations analysts. Even when Airforce One landed in Riyadh, the President was greeted by the governor of Mecca. This was a deliberate snub by MbS. Still, President Biden went and met Crown Prince MbS where he did that awkward fistbump and urged the Kingdom to pump more oil. MbS then differed on the decision of pumping more oil to OPEC+ (which includes Russia). Most importantly, President Biden during the 2020 campaign labeled Saudi Arabia and MbS a pariah for its murder of journalist Jamal Khashoggi and for the brutal assault on Yemen. Now President Biden has to beg the Saudis to pump more oil.
It will be interesting to see how China’s Xi Jinping is treated when he visits Saudi Arabia soon.
There is another reason for visiting Saudi Arabia. As we reported before Saudi Arabia has been very interested in joining the BRICS partnership of nations. Many gulf countries like Saudi Arabia and Qatar have also shown intent in joining the Shanghai Corporation Organization (SCO). These two organizations are challenging the current US lead global order. The US is desperate to keep Saudi Arabia in the US camp. This is another reason for President Biden’s visit to Saudi Arabia.
Overall, the US so-called shale “revolution”, changing global order and increased trade ties with an emerging east, Saudi Arabia’s need to diversify its economy, and American disengagement in the Middle East is turning Saudi Arabia to look east. As we head towards a multipolar world, the battle for West Asia is just heating up.