This kind of change can't help but bring with it a fundamental reordering of global geopolitical relations, and the type of change we would expect to be seeing is exactly what we are seeing now with the Saudi shift away from the US.
By any reasonable standards, Saudi Arabia went insane last month. How else to explain a country that ended up rejecting a seat on the influential UN Security Council that it had been lobbying for, followed by the nation's intelligence chief publicly announcing that the kingdom would be reducing cooperation with the U.S., long one of its most important and influential allies? For casual observers of MidEast politics, these events must be seen as downright shocking...
...but not completely inexplicable. There are a number of explanations that can be given for what's happening, and many of them have already been belabored by the dinosaur lamestream media. The Saudis are angry that the Security Council failed to bomb Syria to smithereens according to one obvious interpretation. The Saudis are angry that the US is failing to bomb Iran to smithereens over their alleged nuclear weapons program according to another.
But here's another intriguing explanation: China has just become the world's largest oil importer, surpassing America's 6.24 million barrels per day of oil imports with 6.3 million barrels per day of their own. More than a chance occurrence or a momentary blip, this is part of a long term trend. As Oil Price notes in a recent report, energy consultancy outfit Wood Mackenzie is predicting that Chinese oil imports are going to hit a whopping 9.2 million barrels per day, or 70% of world demand, by 2020.
This kind of change can't help but bring with it a fundamental reordering of global geopolitical relations, and the type of change we would expect to be seeing is exactly what we are seeing now with the Saudi shift away from the US. Surely the Saudis are motivated by their foreign policy concerns in the region, including their desire to see the overthrow of the Shia-friendly Assad government and the neutralization of their Iranian rivals, but it should never be forgotten that the Saudi kingdom begins and ends with its main resource, oil. This is true because the House of Saud is primarily a Western-backed artificial creation, backed up through secret (but now declassified) dealings like the 1945 oil-for-security deal reached by FDR and Abd al-Aziz aboard the USS Quincy in the Suez. For the Saudis to back away from this long-standing relationship is profound, and can only signal a type of revolution is taking place.
One aspect of that change is the shale oil revolution taking place in the US right now. Like everything else when it comes to the petroleum industry, this so-called “revolution” has been overhyped and oversold, but it is nevertheless altering the picture of American oil consumption enough to have an impact on the global situation. Overzealous claims that America is on the verge of energy independence are disingenuous to say the least: there is still a 7.73 million barrel per day gap between US crude oil production and consumption, greater than the entire daily output of the US oil industry. But as a result of increasing US consumption that gap is closing while China's is opening, and any oil exporter who knows what side his rice is buttered on would be able to see that the patron government of the future is in Beijing, not Washington.
The implications that this change is having and will have on the global monetary system are hard to overemphasize. Firstly, it is important to understand that the current monetary paradigm, with the US dollar as the world reserve currency, is built on the back of the “petrodollar” system engineered by Kissinger in the 1970s. As we have explored previously in these pages, the world monetary system from the end of the Second World War until 1971 was defined by the Bretton Woods agreement, whereby US dollars were convertible to gold at the fixed rate of $35/ounce. There were signs of stresses and cracks in that system for years before its final abandonment in 1971, when Nixon took the dollar off the gold standard and thus formally scrapped the Bretton Woods system. But global finance abhors a vacuum, and something had to come along to take the place of that system, especially since the artificial demand for US dollars that it created had allowed the US to rack up increasingly unsustainable deficits, to the benefit of its own population and at the expense of the global system. With this in mind, Kissinger convinced the Saudi royal family to buy into the “petrodollar” system, whereby they priced oil in US dollars exclusively, creating an instant worldwide demand for the Federal Reserve Notes. The Saudis would also invest in US treasuries and bank their dollars in the US banking system. In exchange they would receive US military protection and aid, including weapons sales. Within two years of the implementation of the Saudi-US deal, the entire OPEC conglomerate was on the petrodollar system, and a further four decades (and counting) of US dollar hegemony was assured.
So what does it mean if the Saudis start turning away from the US? Could it mean the end of the petrodollar system? Of course it could. Not in the immediate future, of course, but we could start to see the shift if and when China starts to step up to the plate and assume its role as world's largest oil importer and soon-to-be largest economy by GDP. Given China's vast (and growing) oil dependence, the Chinese long game aloofness that we talked about last week might have to be ditched sooner rather than later. It's inconceivable that a nation so much in need of dependable, bankable oil resources as China could continue being so detached geopolitically. And at some point, it's going to make sense for China to stop paying the Saudis and other oil producers in US dollars.
So could a Saudi oil bourse of the future be priced in renminbi? Well, not without some fundamental changes to that currency. The first thing China would have to do is make their currency convertible, so that it can be freely bought and sold without government regulation. China went part of the way there in 1996, when the RMB became convertible on the current account (dividends, trade and service-related foreign currency transactions), but not the capital account (foreign direct investment). But lo and behold the renminbi is set to be fully convertible in the coming months, thanks to the new Shanghai free-trade zone. Why is Beijing allowing the Shanghai FTZ to flaunt their strict capital controls and dabble in a convertible RMB, when such a move threatens to let the lid off the steaming pot of capital outflows that are presumably waiting to flee the Chinese economy? Perhaps they have no choice. With China's increasingly insatiable demand for oil, the country is increasingly being forced into its role as a global player, financially and monetarily, whether they like it or not.
Of course, this is where the dangers start to creep in. Anyone who thinks that the US will quietly sit back and watch China step into its current role as de facto global currency by usurping the petrodollar must be living on another planet. After all, governments that flirt with the idea of oil bourses priced in other currencies have a funny habit of being wiped off the face of the map. Just ask Saddam Hussein. With each step away from the US, countries like Saudi Arabia risk incurring the world's undisputed global hegemon's wrath. In some ways, this is already apparent. There is no doubt that the general tone of American media coverage of Saudi Arabia is itself changing fundamentally. Whereas it was once completely off-limits for American media to mention the appalling treatment of women in Saudi society (despite constant coverage of this issue in relation to Afghanistan or Pakistan, for instance), there is increasing coverage and awareness of draconian Saudi practices such as the female driving ban. Even CFR mouthpiece Fareed Zakaria is piling on, feeling free to use his CNN and Time platforms to throw dirt back at the Saudis regarding their fostering of international terrorism, evidently getting the green light from his globalist masters to further drive the rift between the once-staunch allies.
And all of this only represents one sliver of the overall oil geopolitics puzzle that is developing in the 21st century. Other key areas to examine the changes in global relations on this front include the African continent, espcially Chinese involvement in places like Sudan, and the Central Asian Caucasus region, where Western-backed terrorists wait on China and Russia's doorstep, constantly threatening disruptions in a volatile and resource-rich area.
We are still in the early stages of this transformation of global alliances in this new global oil relations game, so much remains on the table. But one thing is certain: all things being equal, the contest for oil between China and the US is sure to be heating up over the course of this decade. As the old Chinese curse has it: “May you live in interesting times.” When it comes to oil geopolitics, more interesting times would be difficult to imagine.