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The Death Of King Abdullah

The-Death-of-King-Abdullah

What’s the future of oil geopolitics?

On January 23rd, Saudi Arabia’s gerontocrat King Abdullah bin Abdulaziz passed away ta the age of 90 years. He was just shy of reaching the 10th anniversary of his accession to the Saudi throne — he took over in August 2005. Prince Salman bin Abdulaziz was appointed as the new king of the Saudi kingdom. Since ascending to the throne, Abdullah took steps toward broader freedoms and invested some of the country’s vast oil wealth in large-scale education and infrastructure projects.

When seen from the perspective of global oil geopolitics, the death of king Abdullah could hardly have come at a more sensitive time. Oil prices have plummeted significantly in the past six months and investment pundits predict that prices will further plunge. Fingers have been pointed at the Saudis for this fall. But low oil prices have started to eat into their own reserves too. So the infamously spendthrift ‘oiligarchs’ of the House of Saud are feeling the pinch. Now a large question mark hangs over not just the future of Saudi Arabia, or even the global oil market, but the current monetary order itself.

Those adept at reading between the lines would have noticed few of the threads of this potentially world-changing narrative in the decidedly reserved establishment media coverage of the event. But in order to get beyond the fluff one has to do a bit of digging. And for that purpose, one needs to know something about the history of the US-Saudi relationship and how it forms the backbone of the world’s economy.

Cementing the Relationship

The US-Saudi relationship was cemented in a meeting between President Roosevelt and Saudi Arabia’s founder, King Abdulaziz, in February of 1945. The meeting took place on the USS Quincy on Egypt’s Great Bitter Lake. This seminal meeting was the culmination of a series of events that made the countries’ mutual interdependence apparent. The American owned-and-operated “California Arabian Standard Oil Corporation” (which later became ARAMCO) had begun exploration in the country in 1933 and had struck oil near Dhahran. While still quite small as a contribution to America’s overall oil supply, the value of the country’s potential oil reserves (not to mention its geostrategic location on the Arabian Peninsula) had led Roosevelt to declare in 1943 that “the defence of Saudi Arabia is vital to the defence of the United States.”

The Saudis did also recognize that if they have the US as an ally, they will get a leverage in a region that is highly unstable and — probably — unfriendly. So, the Roosevelt-Abdulaziz meeting begot an arrangement that allowed for US airfields and flyover routes across Saudi Arabia. The Saudis enjoyed an implicit promise of American military protection and an explicit promise that on the question of Palestine and Jewish immigration to the region, Roosevelt would “do nothing to assist the Jews against the Arabs, and would make no move hostile to the Arab people.” That promise was, though, reneged on just three years later when the US supported the creation of the state of Israel in 1948.

The dawn of the Cold War saw the relationship becoming stronger and cordial as President Henry S. Truman promised to defend Saudi Arabia from Soviet influence. As a result, more US military installations were constructed in the country and a US Military Training Mission to provide weapons and combat training to Saudi security forces was also established.

The Saudi-US relationship kept along howsoever despite many ups and downs and a widespread dissatisfaction with American military presence amongst the Saudi masses. However in October 1973 relations touched a nadir as Saudi Arabia joined the OPEC oil embargo of the US due to its support of Israel in the Yom Kippur war. The crisis made Americans realize the fact that they still are energy-hungry, and not an energy-independent nation. Nixon’s closing of the gold window and ending of the Bretton Woods system had set off its own crisis in which Washington found itself unable to rely on a limitless demand for dollars for the first time since the end of the Second World War.

In all of this turmoil, Secretary of State Henry Kissinger, who was also Nixon’s National Security Advisor, found a way to kill two crises with one stone. After some threatening talk from the US about viewing its access to OPEC oil as a national security concern, Kissinger was able to convince the Saudis to accept a deal whereby they would sell oil exclusively in US dollars, and those dollars would be recycled back through US banks for the purchase of US treasuries and US arms. In return, America would continue to extend its security guarantee over the Kingdom. And with that one diplomatic stroke, the petrodollar system was born. This system ensures continuing demand for the completely fiat US federal reserve note and has allowed the dollar to retain its world reserve currency status.

The Recent Rift

In recent years, however, a rift between Washington and Riyadh has been growing. The rift has formed over a number of fault lines. The Saudis have been angered by America’s seeming unwillingness to force the issue with arch-rival Iran over their nuclear programme. They have been angered by America’s reticence in launching an all-out assault on regional rival Syria. They have been angered by America’s abandonment of regional partner Hosni Mubarak during the Arab Spring, which has continually threatened to spread to Saudi Arabia’s predominantly Shia — and oil-producing — regions.

The Saudis have signalled their displeasure in recent years. Perhaps most spectacularly, the Saudis turned down a coveted seat on the UN Security Council at the end of 2013 out of anger over the US’ inaction on Syria and Iran. More subtly, the Saudis have shown signs that they are edging toward a closer relationship with China, from the adoption of a “look east” approach under the reign of King Abdullah that saw the majority of Saudi oil heading to Asia, to a nuclear energy cooperation pact in 2012, to the revelation of China’s sale of advanced ballistic missiles to Saudi Arabia.

The Americans, meanwhile, have responded by subtly reminding the Saudis that they have numerous Swords of Damocles hanging over the Kingdom, any one of which could be dropped at any time to sever Washington’s “special relationship” with Riyadh. It is no secret to anyone that the “classified 28 pages” in the Congressional report on 9/11 pertains to Saudi involvement in the attack; that much has been known and talked about ever since the report was released. But interestingly the issue has suddenly re-surfaced in the news in recent years, spearheaded by the likes of former Senate Intelligence Committee Chair Bob Graham. And just last year, the US Supreme Court ruled that 9/11 victims’ families can sue Saudi Arabia for their complicity in the attack. The implication is clear: if you sever the petrodollar relationship, we can always release the 28 pages and turn the American public against you.

The-Death-of-King-Abdullah-

The Future of the Petrodollar

It should now be apparent that what is at stake with every royal succession is not just the domestic politics of Saudi Arabia, but the course of geopolitics and, ultimately, the global economy. No one needs reminding of the importance of oil on the world stage at the best of times, but in uncertain times like this a change of leadership in the House of Saud is particularly nerve-wracking.

The early consensus was that the accession of King Salman was going to be a non-event, or at least as close to a non-event as is possible in these circumstances. Indeed, the new king used his first public address to stress that there would be no change in direction for the country under his reign. Recent developments, however, suggest that promise may have been mere lip service to keep markets calm during the transition. King Salman fired Prince Mishaal, governor of the Mecca region, and Prince Turki, who governed the capital Riyadh. Both princes were sons of King Abdullah. Salman also made a sweeping cabinet reshuffle that saw new faces in the intelligence, social affairs, civil service, communications and information, culture and information and other chairs.

A lot will hinge on whether King Salman will continue King Abdullah’s uneasy relationship with Obama, or whether a fresh start will be made. What hinges on this alliance is not just the future of a bilateral security relationship, but the foundation of the current monetary order.

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