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This is probably the most crucial financial war in recent memory. When Nixon took the US off the gold standard in 1971, gold was replaced by oil. The US made an agreement with Saudi Arabia to ensure that oil would be sold only in US dollars. This is what created the so-called “petro-dollar,” requiring oil-importing countries to hold dollars to pay the Saudis. Other nations followed their lead.
But now, with Russia being a huge oil exporter, and with Russia accepting the renminbi (or yuan, China’s currency) as payment for its oil, the petro-dollar era is coming to an end. One of the most significant casualties of this currency war is the end of the US-Saudi alliance.
The Saudi government is already having to cash in (dump) its US dollars in order to pay for the losses it is sustaining due to the drop in oil prices. Last year their deficit climbed well over $100 billion. At that rate, they will be out of money by 2020.
Likewise, the Saudis find themselves at odds with Russia over their Syrian policy. Saudi Arabia supports ISIS and all of the so-called “moderate” terrorists trying to overthrow Syrian president Assad. This is in accordance with their alliance with the US. But the US has been blocked by Russia from sending troops and have been relegated to the sidelines by merely assisting the “rebels” with arms and money. The Saudis feel like Washington has betrayed them, so it is likely that a lot of promises were made at the start of this conflict—promises which have not materialized in a meaningful way that might actually win the war.
The friction between the US and Saudi Arabia over Syria is being compounded with Saudi losses in oil sales to China, as Russia increases its market share. If the Saudis don’t start accepting the renminbi soon, they will find themselves losing China as their client.
Here is an article that addresses this problem.
Saudi Arabia has long trumped Russia in the Chinese oil market.
"Russia is the biggest rival to the Saudis in the single-largest oil demand growth country in the world," RBC Capital Markets' commodity strategist Michael Tran wrote….
But now the Russians are creeping in — and the Saudis are getting nervous….
Interestingly, part of Russia's success in China has been attributed to its willingness to accept Chinese yuan denominated currency for its oil. (And not, as others have suggested, because of any sort of allegiance to the Sino-Russo friendship.)….
"If Saudi Arabia wants to recapture its number one ranking, it needs to accept the renminbi for oil payments instead of just the dollar," Gordon Kwan, the Hong Kong-based head of regional oil and gas research at Nomura Holdings Inc., told Bloomberg back in June.
How long can Saudi Arabia hold out? Perhaps the question should be asked in reverse. How long can the US keep the Saudis shackled to the US dollar? The pressure is building. A breakup in this alliance could easily result in the downfall of the entire government or at least of the current dynasty. This would destabilize the entire Islamic world, since the Saudis are the custodians of Islamic holy places. Depending on what should happen and where the blame might be placed, this could easily bring about another religious war or jihad.