Saudi Arabia 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 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 hard to assess how serious Saudi Arabia is, but the implications of such a move are far-reaching and hard to overstate.

“The Saudis know they have the dollar as the nuclear option,” a source familiar with the matter told Reuters. Another source put it this way: “The Saudis say: let the Americans pass NOPEC and it would be the U.S. economy that would 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. This time around, the situation is different, for several reasons. First, 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. Related: What’s Next For Algeria As Bouteflika Steps Down

The House and Senate just passed a bill that cuts off U.S. aid for the Saudi war in Yemen, a historic rebuke to Saudi Arabia as well as a historic move to weaken the American executive branch’s authority over war. President Trump will likely veto the bill, but a few years ago, such a vote was unthinkable. Saudi Arabia’s missteps contributed greatly to the passage of the bill.

Another reason why the odds of NOPEC becoming law are greater than ever are because of the unpredictable nature of Trump himself. He has embraced the Saudi government, but he also uses OPEC as a punching bag. Although the Saudis, to a large degree, control OPEC decisions, they are distinct entities in Trump’s mind. Only a few days ago he tweeted: “Very important that OPEC increase the flow of Oil. World Markets are fragile, price of Oil getting too high. Thank you!”

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.

That brings us back to the Saudi threat to undermine the dollar. 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 setup 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. Related: The Energy Solution That Could End The Border Wall Debate

To date, those efforts have done little to undercut dollar domination. But a Saudi decision to diversify away from the dollar would be the most powerful move yet.

However, there are plenty of reasons why this scenario won’t play out. The bill may not pass the U.S. Congress to begin with. But even if it became law, the Saudis have plenty of obstacles standing in their way, not the least of which is their currency peg with the dollar. Riyadh is also dependent on the U.S. military alliance, and dumping the dollar would put that in jeopardy. Those reasons alone might deter Saudi Arabia from moving forward with currency alternatives.

A separate threat, which is arguably more doable from the Saudi standpoint, would be to produce oil at maximum levels to crash prices. OPEC officials have reportedly been telling Wall Street executives that they would be forced to take such action if the NOPEC bill becomes law. “NOPEC legislation won’t serve the U.S. interest,” OPEC Secretary General Mohammad Barkindo said in March in Houston at the CERAWeek Conference.

By Nick Cunningham of Oilprice.com

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