Saudi Arabia, on April 4th, threatened to sell its crude oil in currencies other than the U.S. Dollar if Washington passes the NOPEC bill that would expose OPEC members to U.S. antitrust lawsuits.

The NOPEC, or the No Oil Producing and Exporting Cartels Act, was first introduced in 2000. This legislation would allow the Justice Department to sue foreign countries for cooperating to limit oil output to raise oil prices. To Riyadh, this act represents a significant threat to OPEC’s ability to regulate oil supply through the setting of output limits for each member in times of oversupply.

This threat is not the first time Saudi Arabia has made a financial threat to the United States. In 2016 the kingdom threatened to sell off nearly $1 trillion of investments in the United States and its $160 billion holdings in U.S. Treasuries. The threat occurred when Congress planned to pass a bill that would allow the Saudi government to be held responsible in the U.S. for any role in the Sept. 11, 2001, attacks.

Although the probability of “NOPEC” coming into force, and Riyadh dumping the U.S. Dollar is slim; should Riyadh follow through with the threat, the impact on the United States will be immense. Dumping the U.S. Dollar would decrease Washington’s clout in global trade, chip away its influence over global financial markets, weaken its ability to enforce sanctions on nation states, and destroy the Petrodollar regime ultimately ending the U.S. Dollar as the world reserve currency and a U.S. economic collapse.

Saudi Arabia’s strategic importance to the United States

Riyadh is vital for the US-led world order by ensuring continuous oil supply, protecting vital trade routes (the Straits of Hormuz, the Bab el-Mandeb and the Suez Canal), and influencing Sunni Islamic sect in the Middle East.

Furthermore, it produces 10 million barrels of oil daily, and exports 9 million per day, the largest crude oil exporter with 28% of global crude oil market share.

The United States imports over 950,000 barrels daily from Saudi Arabia. America values this influence as Riyadh acts as a balance-of-power against Iran. Saudi Arabia is the United States’ 22nd most significant trading partner, and both the Kingdom and the U.A.E account for the majority of U.S. goods exported to the Middle East & North Africa region.

Petrodollar Dominance

Faced with massive debt from the Vietnam War, stagflation, and huge domestic spending; the U.S., in 1971, ended the Gold standard. By 1974, the U.S. swayed Saudi Arabia and other OPEC members to regularize their crude oil sales in U.S. Dollars. In return, Riyadh and other Gulf states secured U.S. military protection.

The petrodollar regime pushed the U.S. Dollar to world’s main leading currency. Importing countries that wishes to purchase crude oil need the U.S. Dollars. Thus, many countries hold majority of their reserves of U.S Dollars. All leading indices; the West Texas Intermediate (WTI), North Sea Brent (Brent), and Canadian Crude Index are denominated in U.S. Dollars.

Nevertheless, they have been challenges to the Petrodollar system.

China, in March 2018, launched Yuan-denominated crude oil futures denominated in CNY (Petro-Yuan) for oil marketing for the Far East. As the world’s biggest importer of crude oil, Beijing has long felt that pricing all its millions of barrels of imports should be priced in Yuan. Russia, Iran, and Venezuela; subject to U.S. sanctions; has tried to sell oil in other currencies. However, its has have done little to challenge the U.S dollar’s supremacy in the oil market.

Efforts to diminish the U.S. Dollar dominance role in oil trading have been relatively limited to date. However, a move by Saudi Arabia to dump the dollar would lend significant momentum to Russia, China, and the European Union which have been seeking to diversify global trade away from the U.S dollar to weaken U.S. influence over the global economy.

This threat only further proves that Saudi Arabia is willing to go to extraordinary lengths to protect its advantage in the global oil market.