Saudi Arabia has threatened to use the “nuclear option” of undermining the petro-dollar if the U.S. moves forward with the NOPEC bill.
The U.S. Congress has been mulling legislation, known as the NOPEC bill, which would allow the US Justice Department to take antitrust action against OPEC for manipulating the oil market. Specifically, the bill would remove sovereign immunity countries have from such action, allowing the U.S. government to sue. In theory, the law would prevent OPEC from coordinating production cuts.
It’s still unclear if the Congress will pass the bill, and it’s also not guaranteed that Trump will sign the bill if it reaches his desk. Moreover, even if he did sign it, it’s also not a done deal that the Justice Department would take punitive action.
Nevertheless, Saudi Arabia clearly views the threat as a serious one. Reuters reports that Saudi Arabia has threatened to sell its oil in currencies other than the U.S. dollar if the bill becomes law. Such a move would have enormous implications.
The global oil market is almost entirely conducted in dollars, which provides the foundation for dollar domination in the global financial system. Introducing new currencies in the oil trade could undercut demand for the dollar, diminish American influence over global finance, weaken American influence over sanctions, and thus, undercut its geopolitical reach.
It’s difficult to assess how serious Saudi Arabia is, but the implications of such a move are far-reaching and hard to overstate. If the Americans pass NOPEC the U.S. economy could fall apart.
Some version of the NOPEC legislation has floated around for years, but past U.S. presidents from both parties have opposed the measure over fears that it would damage the U.S.-Saudi relationship. Saudi Arabia has seriously damaged its standing in Washington through its war in Yemen and over the murder of Saudi journalist Jamal Khashoggi. With goodwill evaporating, its grip on the U.S. Congress has weakened. To the extent that oil prices are high and Trump feels that gasoline prices become a political liability, he may feel more compelled to sign a NOPEC bill.
If Riyadh actually carried out such a threat to switch away from the dollar for oil sales – which is definitely not a sure thing – it would have some eager partners. China, Russia, Iran and even the European Union have all at times supported some alternative to the dollar-based international order. The Trump administration’s excessive use of sanctions, and its bullying of key allies in Europe, have many governments ready for currency substitutes. As Reuters notes, Russia has tried to sell oil in euros while China setup a yuan-denominated oil contract in Shanghai to rival the dollar. Iran has also eagerly tried to promote oil sales in other currencies in order to skirt U.S. sanctions. The EU set up a special purpose vehicle to help European companies continue to do business with Iran, and it also recently set up a working group to promote the euro as an alternative to the dollar.