Is The Sun Setting On U.S. Hegemony In The Persian Gulf?
The importance of oil, combined with geopolitical developments, means the next energy crisis will likely spell the end of the American empire.
It's not that I'm afraid to die. I just don't want to be there when it happens.
- Woody Allen
Sometimes, expected events still manage to take us by surprise when they occur. Part of this is because we might know what’s coming, but we don’t get to dictate when it happens. As drivers, we know that, statistically speaking, we’re all going to be involved in a motor vehicle accident at least once in our lives, but we’re still stunned when it occurs.
This is where the United States and the broader West finds itself, currently. The rising cost of energy prices is hardly unprecedented, but, when it happens, governments find there are no good answers. How does a country, a superpower, address the matter of countries no longer wanting to trade oil using the the United States Dollar (USD)?
More on that in a minute. First, extraordinary events are taking place in the Middle East, specifically the oil-rich Persian Gulf region:
First, Syrian President Bashar al-Assad’s visit to the UAE on Friday. The warm welcome laid on for him by its leaders was a slap in the face of the US administration, its strongly stated objections to the visit, and its sanctions aimed at de-legitimizing the Syrian government.
Second, the growing defiance of US hegemony by Saudi Arabia and the UAE, OPEC’s two largest oil producers. Most notable was their rejection of US President Joe Biden’s pleas to increase oil production in order to push down prices and provide extra supplies to enable western sanctions of Russian oil and gas imports.
Third, the failure of British Prime Minister Boris Johnson’s visit – on Washington’s behalf – to Abu Dhabi and Riyadh, where he conveyed veiled threats to the two countries should they fail to toe the western line on Ukraine, join in imposing economic sanctions on Russia, or break their oil production agreements with it.
Fourth, Saudi Arabia’s invitation to China’s President Xi Jinping for an official visit and Riyadh’s openness to pricing its oil sales to Beijing in yuan. This signals that the kingdom and possibly other Gulf states may be willing to join the new global financial system Russia and China are developing as an alternative to the western one.
Of the four developments, the reception accorded to President Assad in Abu Dhabi and Dubai was the clearest sign of this Gulf rebellion against the US and its domination. The visit didn’t need to take place now; that it did shows more about the mood in the Gulf centers of power than anything else. [bold mine]
It’s tough to underscore the seismic shift this constitutes. Since the early 20th century, the Persian Gulf region has been largely dominated by, first, the British, then the Americans, after the former withdrew from “East of Suez” in the early 1970s For over a century, the nexus of world energy supply has been subject to Anglo-American hegemony, to our great benefit. That party now seems to be coming to an end, as the Gulf Arab states, who also benefited tremendously for decades thanks to this association, are deciding that working with London and Washington no longer serves their interests.
What the layperson in the West ought to know is that this not only portends a future of higher energy prices, but higher prices overall and a weakening U.S.-Western economic/financial position. While the U.S. never had much of an ability to control oil prices, it retained a form of indirect price control: given favorable exchange rates, it drove down the cost of oil and strengthened the USD, giving America the ability to rack up sovereign debt without much consequence. This oil-dollar “partnership” is a big reason why the USD became the world’s reserve currency. The ability to spend virtually without limit, while offshoring one’s own economy due to the cost-effectiveness of globalization, is the dynamic which has underpinned the American economy the last 40-plus years and much of the global economic order.
Now, it looks like those days are coming to an end. What would it mean for oil-producing giants to no longer trade using the dollar? Here’s a brief, but comprehensive, explainer on what it means for oil to be priced according to the dollar:
Another way to look at is to see how a London-based trader might see it. A London-based trader who buys and sells oil in dollars, thinks about the dollar in relation to the British pound. Right now the dollar is worth about £0.8, or £1 is worth $1.25. The price of Brent is about $67 per barrel. If the dollar loses value—say it becomes worth £0.7, or £1 is worth $1.43—then the London trader is willing to spend more dollars on that barrel of Brent. Maybe she is willing to spend $76.6 per barrel.
Of course, the numbers are never that simple. Over the time that the dollar loses value, other issues and events impact the oil market. Therefore, traders cannot directly correlate crude price changes to the change in the dollar value. But the example is informative. If the dollar does drop significantly, there should be a corresponding force pushing up the price of crude.
Simplified: Decreasing dollar value = higher oil prices. This is textbook inflation. This also ensures our current inflationary environment will not only remain chronic, but that hyperinflation, a scenario previously considered impossible, including by many financial analysts, is no longer such a remote possibility. If the world’s most valuable commodity, the one effectively backstopping the world’s reserve currency (USD), is no longer traded in that currency, what happens to all those dollars circulating within America’s borders and beyond it?
Here’s an article from 13 years ago explaining the risks and benefits of the Gulf energy giants moving away from the dollar, back when recent events first began to be viewed as an increasingly likely scenario:
If the Gulf countries stopped pricing oil in dollars, they would also presumably stop pegging their currencies to the dollar, a more significant development. And of course Chinese officials have been making noise for several years about the need to move away from a dollar-dominated world. The problem that both China and the oil exporters have is that they’re holding gigantic stashes of dollars that would suddenly be worth a lot less if they started trying to sell them off. So we’ve got this impasse, where lots of people complain about the dollar’s supremacy but nobody seems willing to do anything about it. In fact, a succession of U.S. Treasury Secretaries has trooped to Beijing trying to persuade the Chinese to do something about the dollar’s supremacy by letting the yuan float or at least rise sharply against the dollar, and met with strong resistance.
It’s the sense that this can’t go on forever that keeps putting downward pressure on the dollar. And this shouldn’t go on forever. The U.S. economy’s share of global economic output has been declining and will almost certainly continue to decline as formerly poor countries get richer. With that, the dollar’s role will need to change.
Such a change wouldn’t be unmitigated bad news for Americans. As I’ve written before, having the dollar as the world’s currency has been a mixed blessing. The dollar’s global role inflates its value, for example, which makes imports cheaper for consumers here but also makes U.S products less competitive globally. Dollar supremacy also allows the U.S. government (and until recently the private sector) to get away with wildly unbalanced budgets without paying an immediate penalty in higher interest rates, which can be nice for a while but tends to end in trouble. The global capital-flow imbalances that many economists now say were at the root of the financial crisis are in significant part a product of the dollar’s outsized role.
All of this means that it may well be in the long-run best interest of the U.S. to push for an orderly transition away from the current dollar-based global monetary system and toward one built around currency baskets, the International Monetary Fund’s special drawing rights, the bancor, gold or whatever other measure of value we can all agree on. In other words, it’s not the worst news in the world that the Persian Gulf countries are talking about moving away from the dollar. Even if they say they aren’t. [bold mine]
The argument makes sense - the dollar as the world reserve currency enables and incentivizes very bad behavior. We can’t get away with it forever, so we may as well face the music now and adjust to the changing world order on our terms, even if it means our decline. After all, being Number One means little if our long-term survival cannot be ensured.
The problem is, these sorts of adjustments don’t come painlessly. In fact, for a country like the U.S., it might be an exceptionally difficult adjustment due to our massive energy needs. It’s not just our cars that require petroleum, much of our electricity is still oil-generated. Then there’s the matter of fertilizer. Take a look at how high fertilizer costs have soared:
Fertilizer abundance is required for mass agriculture. You cannot feed millions without it. This is why food shortages are now suddenly a major concern, including among world leaders:
This isn’t a problem you fix by saying, “Oh well, I’ll just eat less.” The choice won’t even be there and basic staples that underpin a nation’s food supply, such as cooking oil and grain, will suddenly become available in much shorter supply. Take a look at what happened in France recently:
The good news is that this is probably as bad as it’ll get in the West. However, most of us haven’t lived with major shortages in the past. If you think you’re ready for it, despite having made no preparations (most of us aren’t prepared, that’s just a fact), well, wait until it actually happens. Again, this isn’t a simple matter of simply cutting out certain things from our diet, nor will driving electric cars fix this problem. If vegetable oil isn’t available, what do you cook with? If we run into a grain problem, basic staples like bread, pasta, and rice won’t be available or will increase in cost. I can’t stress enough - this isn’t just a matter of there not being nice things to eat, to say nothing of how a food shortage will impact poorer countries in Africa, Asia, and South America.
The importance of oil, combined with geopolitical developments, means the next energy crisis will likely spell the end of the American empire. The peculiarities of the present day - rapidly declining U.S. power, multiple rival actors, less cooperation by other countries, including those still considered our allies and partners, and the globalized economy - means the U.S. won’t be able to weather the storm as well this time. In Europe, the problem will be even more acute, due to their dependence on Russia for oil and natural gas. All the attempts to cut Russia off from the world economy for its invasion of Ukraine amount to something of a bluff; Russia has now demanded payment in rubles, a demand Germany has rejected.
However, if Russia cannot spend its dollars or Euros due to the sanctions levied against it, why would Russia accept payment in a currency other than the ruble? And where would Germany and Europe turn to for energy? The Gulf Arab countries, who’ve seemingly cast their lot with Russia? While some think it’s Vladimir Putin who’s actually bluffing in the sense Russia needs to start selling its energy resources to Europe at some point to survive, the fact is, markets for Russian energy exist elsewhere. India, for example, has emerged as a major customer of Russian energy as of late.
Eventually, the cost of energy in the West will become so unbearable, there will be greater public pressure to resolve the crisis any way possible to relieve the pain. It’s one thing to express a willingness to endure higher prices to stick it to Putin. It’s another to experience chronic inflation, or, worse, a recession. Reality has a tendency to put things into their rightful perspective. In the U.S., at least one measure indicates consumer confidence has plunged to its lowest level since the wake of The Great Recession of the late 2000s, a terrible sign for the economy:
Returning to the news from earlier in the post about the tightening of relations between China and Saudi Arabia, I want to return, once again, to what University of Wisconsin professor Alfred McCoy wrote back in 2010 about the impending end of the superpower reign of the U.S. It still amazes me how prescient McCoy truly was about events unfolding today:
Oil Shock: Scenario 2025
The United States remains so dependent upon foreign oil that a few adverse developments in the global energy market in 2025 spark an oil shock. By comparison, it makes the 1973 oil shock (when prices quadrupled in just months) look like the proverbial molehill. Angered at the dollar's plummeting value, OPEC oil ministers, meeting in Riyadh, demand future energy payments in a "basket" of Yen, Yuan, and Euros. That only hikes the cost of U.S. oil imports further. At the same moment, while signing a new series of long-term delivery contracts with China, the Saudis stabilize their own foreign exchange reserves by switching to the Yuan. Meanwhile, China pours countless billions into building a massive trans-Asia pipeline and funding Iran's exploitation of the world largest percent natural gas field at South Pars in the Persian Gulf.
Concerned that the U.S. Navy might no longer be able to protect the oil tankers traveling from the Persian Gulf to fuel East Asia, a coalition of Tehran, Riyadh, and Abu Dhabi form an unexpected new Gulf alliance and affirm that China's new fleet of swift aircraft carriers will henceforth patrol the Persian Gulf from a base on the Gulf of Oman. Under heavy economic pressure, London agrees to cancel the U.S. lease on its Indian Ocean island base of Diego Garcia, while Canberra, pressured by the Chinese, informs Washington that the Seventh Fleet is no longer welcome to use Fremantle as a homeport, effectively evicting the U.S. Navy from the Indian Ocean.
With just a few strokes of the pen and some terse announcements, the "Carter Doctrine," by which U.S. military power was to eternally protect the Persian Gulf, is laid to rest in 2025. All the elements that long assured the United States limitless supplies of low-cost oil from that region -- logistics, exchange rates, and naval power -- evaporate. At this point, the U.S. can still cover only an insignificant 12 percent of its energy needs from its nascent alternative energy industry, and remains dependent on imported oil for half of its energy consumption.
The oil shock that follows hits the country like a hurricane, sending prices to startling heights, making travel a staggeringly expensive proposition, putting real wages (which had long been declining) into freefall, and rendering non-competitive whatever American exports remained. With thermostats dropping, gas prices climbing through the roof, and dollars flowing overseas in return for costly oil, the American economy is paralyzed. With long-fraying alliances at an end and fiscal pressures mounting, U.S. military forces finally begin a staged withdrawal from their overseas bases.
Within a few years, the U.S. is functionally bankrupt and the clock is ticking toward midnight on the American Century. [bold mine]
McCoy predicted these events would occur in 2025. We’re now in 2022. It sure seems we’re either on or ahead of schedule.
Make no mistake about it - we’re now in an era where the things the Experts and the foolishly optimistic said would never happen are now happening rapidly. If Anglo-American hegemony in the Gulf isn’t entirely over, it’s certainly in the dying stages. When it finally ends, it won’t be the end for the U.S., but, our daily lives will change so drastically, you won’t be able to tell the difference. Cheap energy has been at the core of our existence of abundance and comfort. What do you think happens when that goes away?
Look, I know this is all deflating news and the easier option is to just ignore me and go about your day. If you won’t listen to me, at least listen to your president, Joe Biden. After all, he never lies, right?
Max Remington writes about armed conflict and prepping. Follow him on Twitter at @AgentMax90.
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