The Saudis and the 'Petrodollar Deal'

Several days ago, there were stories that a supposed US-Saudi deal had elapsed (at its 50th anniversary) with potentially earth-shattering consequences.  We said we’d take a look.

The ‘deal’ (as reported) was that the US would guarantee Saudi’s security militarily in various ways, in return for the Kingdom only selling its oil in dollars, and reinvesting (most of?) those dollars in US government bonds.  This had the effect of propping up the dollar all these years, as nations globally were forced to buy dollars.  End the deal, end the dollar, was the implication.

Hmm.  Well, firstly I know nothing about macro-economics, so I’m always open to being corrected on some of these things.  (My state of macro ignorance has never held me back, since happily I’ve always found that micro competence is the way to make money.)

That said, here are a few thoughts.

• several well-informed commentators stated there never was such a deal !
• whether or not the doomsayers knew this (I thought everyone did, but maybe not), the US is about to sign a significant new defence pact with Saudi.**     We probably won’t be given the full text … but I can’t imagine the US isn’t getting more or less whatever it wants from this
• given that the whole world (not least, China) holds US Treasuries, who wants to crash the dollar anyway?
• the FX markets are just about the most liquid on the planet.  What difference does ‘pricing in dollars‘ make?  (There’s my macro ignorance showing – but seriously now, just tell us.  It isn’t as if oil is priced in dollars at a fixed price, is it?)
• after many years as a net oil importer (indeed, net energy), since the shale revolution the US has been a net exporter.  That makes the world a rather different place to what it was 50, 30, 20 years ago, in ways that I’m sure the US Treasury is on top of
  

From time to time we hear guff about how China wants the whole world to switch to renminbi, or alternatively some devious crypto-currency of their devising.  Nothing much seems to happen.  Similarly Russia says that, Uncle Sam being a busted flush, it will now export its oil and gas in rubles, thank you very much.  The rest of the world waves them a cheery two fingers.  

The simple fact is that liquidity is liquidity.  Loads of countries announce from time to time that they are going to supplant this or that feature of the established (western-led) global order, but it rarely does them any good.  For many years the Russians have sought to develop a global market in “Urals Blend” crude oil in order to break the tyranny of Brent (i.e. UK / North Sea) pricing, but Brent it remains on the world market.  After Brexit, the EU toyed with the idea of relegating English to “just the language spoken by Malta“: and the French fancied their hour had come!  Tough titty, frogs: English it remains, long after the English themselves have departed.  Liquidity is liquidity.

I have a very strong suspicion nothing much has changed between the US and Saudi this year.  At any event, the US dollar remains my hedge against a UK meltdown.  It served me very well during the financial crisis 2007-10.

Any views from those with a proper PPE degree?  

ND

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** Incidentally, within the USA itself there is a significant school of criticism of this deal, not least in military circles: “we don’t need their oil, so why do we need them any more?“  Not too difficult to come up with answers to that question, though.