Who’s the oil Boss?

In 1976 Washington went to Saudi with the “offer-you-can’t refuse”: we buy your oil in US dollars and you buy our Treasury bonds and weapons. And the petrodollar, now accounting for 80 percent of all oil trade, was born.

DATING to the 4th or 5th century, from the midrash or rabbinical interpretation of the book of genesis comes “In the street of the blind, the one-eyed man is called the guiding Light.” That describes well the world and its relationship to the United States post-world War 2.

From the end of World War 2 to the early 1970s was one of the greatest eras of economic expansion for a country in world history. US Gross Domestic Product increased nearly 700 percent. Annual economic growth in the late 1940s averaged over 5 percent, and by the early 1950s had jumped to over 15 percent.

The USSR may have acquired nuclear weapons but was dependent on the world for grain to feed its people.

The Chinese nationalists fled, stripping the mainland of assets including gold, silver, and the dollar reserves. China’s agriculture was 30 percent below pre-war levels, domestic commerce had been destroyed, the currency was valueless, and the economy was based on barter.

The “Guiding Light” boomed militarily, economically, diplomatically, technologically, and it controlled global trade. It’s good to be The King.

In 1972, the world was asked, forced, or slyly anticipated great economic benefits to accept the US dollar as the global reserve currency—the “gold standard”—with the US military enforcing and protecting that “standard.”

W hat a difference 50 years makes. I lost my hair and the US lost its position as “The King.”

It is difficult to understand how soft and hard power f lows even when you try to sit on top of the mountain and look down on the big picture. If a single butterfly flapping its wings in Shanghai can cause a blizzard in New York City, multiply that a thousand times with a thousand different levels of intensity.

Remember, “For the loss of the battle the kingdom was lost; All for the want of a horse-shoe nail.”

President Biden went to Saudi Arabia in July and received a “fistbump” from Crown Prince Mohammed bin Salman (Mbs)—about as an Arabic greeting as a meal of pork adobo and lambanog. Biden also received a promise that “Saudi Arabia has committed to support the global oil market balancing for sustained economic growth.” Very true—sustained economic growth for Saudi Arabia.

October 21, 2022: “The Saudi-led oil cartel Opec+ announced earlier this month that it was cutting 2 million barrels of oil per day.” December 9th: “Saudi crude output at 6-month low.” Any oil price decrease is because of lower demand.

December 14, 2022: No fistbump but “Saudi’s MBS rolls out the red carpet for China’s Xi, with four Royal Saudi fighter jets escorting Xi’s

airplane and cannons being fired when Xi’s plane landed. China is Saudi Arabia’s biggest trading partner, with China buying roughly a quarter of Saudi oil exports.

Here’s the story that the press/ media have yet to pick up its significance. Xi Jinping made an offer difficult for the Arabian Peninsula to ignore. China will be guaranteed buyers of its oil and gas; just pay China in yuan.

In 1976 Washington went to Saudi with the “offer-you-can’t-refuse”: we buy your oil in US dollars and you buy our Treasury bonds and weapons. And the petrodollar, now accounting for 80 percent of all oil trade, was born. Now, Beijing and Moscow have clearly identified how everything—the oil market, global commodities markets, and most trade—is tied to the role of the US dollar as reserve currency.

The use of the dollar is not going to disappear. But this serious move to the “Petro-yuan” is formidable. Opec+ and China effectively control the crude oil price as the largest supplier and user. China’s geopolitical and economic clout is massive, particularly with the “Belt-and-road” and the Shanghai Cooperation Organization coming back in full swing after being shut down by Covid.

Will we see in the future a two tier-price structure for buying crude oil; one in USD and one in CNY? Care to make a wager which will be priced more advantageously for oil importers like the Philippines or India?