Biden’s Saudi Threats Are Reckless, Dangerous

The OPEC logo pictured ahead of an informal meeting between members of the Organization of the Petroleum Exporting Countries (OPEC) in Algiers, Algeria, on Sept. 28, 2016. (Ramzi Boudina/Reuters)

Commentary

In an interview last week with Jake Tapper, President Joe Biden made veiled threats against the Kingdom of Saudi Arabia (KSA) as retaliation for OPEC’s cutback of 2 million barrels of oil per day.

“There’s going to be some consequences for what they’ve done with Russia,” the president was quoted as saying. “I’m not going to get into what I’d consider and what I have in mind. But there will be—there will be consequences.”

Earlier, White House national security spokesman John Kirby had said, “Certainly, in light of recent developments and OPEC+’s decisions about oil production, the president believes that we should review the bilateral relationship with Saudi Arabia and take a look to see if that relationship is where it needs to be and that it is serving our national security interests.”

The Implications

One can’t understate the extraordinary risk that Biden has created for the United States with his reckless, nebulous threat against KSA.

The United States has had a working relationship to produce and deliver oil from KSA since at least 1933, when Saudi Aramco commenced operations. It has been a keystone of U.S. foreign and economic policy since at least that time. Cheap, abundant, oil—much of it from Saudi Arabia—made the United States a post-war industrial juggernaut.

The Critical Role of the Petrodollar

The U.S. dollar (USD) maintains its status as the world’s reserve currency as a consequence of what I call “The Currency Triad” of USD supremacy.

The triad consists of:

1. A deep, large, regulated, and reliable financial market governed by the rule of law;
2. Global oil prices being denominated in USD;
3. Hegemonic military power over all of the world’s democratic and free-market economies.

The second leg of the triad, where KSD and OPEC price their exports in USD, create what are known as “petrodollars.“

While most assume that OPEC prices its oil in USD as a consequence of the “deep, large, regulated, and reliable financial markets” in the USA, it is actually a symbiotic relationship. Countries, such as Japan, that have no domestic oil reserves themselves, keep USD invested in U.S. markets (mostly in Treasurys) in order to buy oil on the world market. So U.S. financial markets benefit from oil being priced in USD. So does USD itself, because this demand for dollars enhances USD value relative to other currencies, effectively making our imports of other commodities and goods cheaper.

Therein lays the enormous risk that Biden is taking by threatening KSA.

Were the United States to impose sanctions on KSA, the kingdom could easily retaliate and price oil in euros or some “basket” of currencies (e.g., yen, yuan, USD, pounds, euros), or, perhaps, even create its own oil-based currency. And if that happened, the astronomical debt levels the United States has run up—$31 trillion, over 120 percent of GDP—would come home to ruin the U.S. economy.

There would be no need for KSA to invest petrodollars in the United States. Instead, KSA could invest its oil proceeds in Europe in euro-denominated accounts, the London exchange, other markets, or even in foreign U.S.-denominated Eurodollar accounts. Instead of sending petrodollars back to U.S. financial markets to finance U.S. deficits, KSA could send them elsewhere.

All this would be a radical shock to drive down the demand for USD and U.S. Treasurys, thereby causing interest rates on the latter to increase substantially. It would seriously affect market liquidity—the ability of businesses and individuals to obtain credit and meet obligations as they come due. Given that KSA could facilitate the repricing overnight, it’s a serious national financial security threat to the United States. It could even trigger a U.S. sovereign debt crisis.

The Way Forward

Hopefully, Biden’s threats were off-the-cuff commentaries; political posturing without any actual consequences. For its part, KSA issued a thoughtful, diplomatic, but firm statement rejecting Biden’s reported request to delay the OPEC oil production cut until after the midterms. The situation will remain stable, but with oil prices escalating.

The way forward, though, is to negotiate peace in the Russia–Ukraine War, even if it means appeasing the Russians. (Appeasement to avoid or resolve wars has been foreign policy since Westphalia, and probably back to caveman days. It didn’t begin or end in Munich in 1938.) That might include ceding the Donbas and Crimea regions and declaring a moratorium or forswearing NATO membership for 25 years or declaring Ukraine as an unaligned country in perpetuity to stabilize the region.

Simultaneously, the United States should reevaluate its clean energy agenda and timeline so that it can recommence U.S. oil and gas production, while also setting a realistic date—perhaps 2100?—and milestone dates to go about achieving a responsible transition to clean energy by whatever means, including technological innovation that allows fossil fuels to be burned cleanly.

It’s clear, though, that the global instability brought about by the Biden administration’s “Green Agenda” and the Ukraine War needs to be put aside to allow a return to sensible policies.

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.