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Is Saudi Arabia ditching the US dollar for the Chinese yuan?

May 26

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For decades, the U.S. dollar has been the primary medium of exchange for international trade, but recent developments are impacting the dollar’s global dominance. China has been making efforts to replace the U.S. currency with its own, the yuan. Now Saudi Arabia is helping accelerate those efforts by agreeing to sell its oil to China — in yuan. Straight Arrow News contributor Peter Zeihan isn’t as worried about de-dollarization as some, because he says no other country has the liquidity needed to establish a credible alternative.

Excerpted from Peter’s May 25 “Zeihan on Geopolitics” newsletter:

The Saudis have relied upon the U.S. for military protections for years, but as the U.S. reduces its naval presence in the Persian Gulf, Saudi Arabia will have to find those protections elsewhere.

As the world’s largest oil exporter, Saudi Arabia has learned a few tricks to curry favor from different countries. Their most recent endeavor is accepting the Chinese yuan as payment for a few hundred million barrels of oil… and that’s not an insignificant amount.

This move isn’t happening because the Saudis are worried about de-dollarization; it’s solely a move to win the Chinese over and establish a new external military guarantee. Still, this remains the only meaningful shift away from the USD, even though it’s from one country, for one commodity, and for one reason.

I’ve said it before, and I’ll say it again… the US Dollar ain’t going nowhere.

All right, so the country that matters here, the only country that in my opinion is doing anything meaningful when it comes to moving from the dollar to something else is Saudi Arabia. Saudi is the world’s largest oil exporter. And they have started to accept payment from a number of Chinese government entities in you won. And we’re talking here about, you know, a few 100 million dollars a cargo so it’s hardly an insignificant issue. There’s no sign that they’re changing the reserves. And I wouldn’t expect that to happen, because there’s a specific rationale here. Now, the Saudis military on paper is great, they’ve got a lot of top notch equipment. But they have demonstrated over and over and over in recent decades that the Saudi military is incapable of operating its own equipment at scale, much less than any sort of coordinated manner. I mean, they can fly their planes and bomb things. And that’s about it. They have always, since their independence relied on an external security guarantor in order to keep them alive. At first, that was the Brits, and for the last several decades, especially under globalization, it has been the Americans. Now the Saudis think a little bit differently. They basically have modeled themselves off of medieval fiefdom. And so they think that bribes work really well, in order to get what you want. This is one of the reasons why they got along so well, with former American President Donald Trump, they saw the world through basically the same lens when it came to operating procedures. So what they’ve done with the United States is, they’ve bought a number of refineries on the US Gulf Coast, and shipped crude from Saudi Arabia to the US Gulf Coast. And if there’s a time when the Americans look like they might be facing high energy prices, or some pressure in the market, they sail additional cargoes and just let them Park off coast until they’re called for. Now, it’s not like the United States, you know, thinks this is bad thing. But the United States gets the vast, vast, vast majority of its oil always has from the Western Hemisphere, with traditionally, Canada and Mexico being our largest suppliers. Now, of course, with the shale revolution in the last 15 years, the United States is a net exporter. So the Saudi angle here is very, very small from an American point of view. But for the Saudis, this was never about the economics. It was about currying favor with the guy who’s supposed to defend you. Well, in the last few years, the United States has moved more and more of its forces out of the Persian Gulf, and we no longer even have a carrier group that’s there on a regular basis. So the Saudis are a little scared. They are concerned that without the Americans guaranteeing their security that they’re screwed, and you know, that’s a reasonable position. So they’ve been looking about for a replacement, and they’re discovering that there isn’t a really good clean one, the French and the Brits could theoretically project power into the Persian Gulf, but definitely not as reliable as the United States. Turkey certainly could. But they would have to conquer Iraq first. And you know, the Saudis have a lot of opinions on a lot of things going on in Iraq, but they’d really rather not have a regional superpower right on their border. India is probably in the long run the most likely outcome, but they’re not Muslim. So the Indians tendency to meddle in political events in places where they have military forces, especially in like Afghanistan has really soured the Saudis. Japan’s a possibility, but Tran has other options as well, most notably, it has gotten in bed with the United States and can access the energy of the Western Hemisphere. That just leaves China. Now, the Saudis aren’t all that hot on China, the Chinese navy really can’t project power. And the Chinese have no experience projecting power in military terms, beyond their own neighborhood, much less going the 5000 miles that would take to get to the Persian Gulf. There’s also low confidence in Saudi Arabia that if a fight broke out, that the Chinese would side with the Saudis against their primary regional rival Iran. But if there’s one thing the Saudis have its money to spare. So they have gone into China and bought up a few refineries entered a joint ventures with Chinese state energy firms, and are shipping crude to China like they used to ship it to the United States. Now, from the Saudi point of view, this might actually work better in terms of currying favor than it ever did with the Americans, because the Chinese actually need the crude. They import three quarters of their total, of which roughly three quarters comes from Africa and the Persian Gulf. And so they’re paying for that and you won, in order specifically in their mindset to bribe the Chinese to come to their aid when the rubber hits the road. This is not an economic decision. This is a political decision being made not because they don’t like the dollar, but because they think the dollar doesn’t give them the military guarantees that they thought it once did. So this is Saudi making a decision because of military strategy as shaped by their own culture, not because they think the US dollar is going anywhere. But still, this is the only example I’m seeing out there of a meaningful shift away from the dollar and it’s only for trade with one country for one commodity. Alright that’s it for me I’m gonna take a shower and like dripping sweat you guys take care

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