Saudi Arabia is reportedly considering a move away from the U.S. dollar in pricing its international crude shipments. That sounds like surprising news, but it’s actually part of a story that’s played out for almost 20 years.
Now this story has a new twist.
Actually, several twists.
The issue is NOPEC, the No Oil Producing and Exporting Cartels Act – proposed legislation that has been kicked around the U.S. Congress for a couple of decades.
Basically, NOPEC would allow the Organization of Petroleum Exporting Countries and its national oil company members to be sued under U.S. antitrust law for anti-competitive activity – as in, artificially limiting the world’s oil supply and inflating crude prices. It would strip away the OPEC states’ sovereign immunity from prosecution.
Earlier this year, the Judiciary Committee of the House of Representatives approved the act for a full House vote, on the same day a bipartisan group introduced NOPEC legislation in the U.S. Senate.
That presumably led to the friction with Saudi Arabia. In April, the Reuters news service reported that the Saudis were threatening to price their crude in currencies other than the U.S. dollar, according to three sources familiar with Saudi policy.
Parting with the Petrodollar?
The idea of OPEC moving away from the dollar is hardly a new one, according to Jim Krane of the Baker Institute at Rice University in Houston. Krane said he’s lived in the Middle East and noted that petroleum-producing countries there have a history of wanting to diversify away from the dollar.
Despite the U.S. dollar’s role as an international reserve currency and its relative stability, complete reliance on the dollar is an all-eggs-in-one-basket dilemma for oil-producing countries.
OPEC member Kuwait eventually shifted away from dollar-denominated oil by pegging its crude prices to a basket of currencies, Krane said.
Krane is the Wallace S. Wilson fellow for energy studies at the Baker Institute, focusing on Middle East and OPEC states and their political and economic strategies. He’s author of the book “Energy Kingdoms: Oil and Political Survival in the Persian Gulf,” published earlier this year.
With a colleague, Krane co-wrote an opinion article about NOPEC for the Houston Chronicle newspaper in March. It noted that action on the NOPEC Act by Congress invites retaliation by the Saudis and the other OPEC members.
If OPEC abandoned the U.S. dollar as a pricing basis, it would not only weaken the dollar’s status as an international reserve currency, it would also make it more difficult for U.S. companies to do business in OPEC countries. And vice-versa.
“Even a cursory assessment of possible blowback shows the likelihood of widespread harm to U.S. interests. Maybe that’s why NOPEC bills have been introduced (in Congress) 16 times over the past 20 years, but never signed into law,” Krane said.
The oil and gas industry, both in the United States and abroad, has staunchly opposed NOPEC. Previous White House policy also has been against the legislation. President George W. Bush vowed to veto NOPEC if it passed during his time in office.
So far, a NOPEC bill has never made it all the way through both the House and the Senate. But at least three big changes in recent years might give NOPEC a better chance of becoming a reality:
The biggest change is the growth of U.S. crude production. At one time, the United States seemed sure to face a continuing decline in oil production and ongoing reliance on OPEC and other exporters. Now it has become an exporter itself, joining OPEC and Russia as a dominant world crude producer.
Second, the killing of Saudi dissident and U.S. resident Jamal Khashoggi in October drew a strong negative reaction from many members of Congress, who especially questioned the possible role of Saudi leader Mohammad bin Salman in the assassination.
Third, President Donald Trump has been a frequent critic of OPEC, calling for the organization’s members to increase crude production and reduce oil prices.
Despite any irritation over NOPEC from Saudi Arabia, Krane noted that a permanent change away from the dollar in international crude pricing remains a long-shot proposition.
He said the dollar is a logical pricing currency for the Saudis, given their relationship with the United States and the fact that the dollar is the reserve currency for Saudi banks. Also, many of the country’s investment holdings are in dollar-denominated assets.
“First of all, I should say it’s extremely unlikely the Saudi Arabians, especially, would move away from the dollar,” he observed.
“Even if they wanted to do this, it would be a long and arduous process,” he said.
Then there’s the question of what other currency or currencies could be used for a pricing basis.
“There’s not a great choice. The euro is stabilizing again, and that would be one choice. Or the Chinese renminbi, the yuan. There aren’t a lot of options,” Krane said.
“It was looking like the euro was going to be a decent choice, until that big European meltdown,” he noted.
At one point, Iraq did move away from the dollar and began pricing its oil in euros. And Iran has had to deal with continuing economic sanctions from the United States and other countries, Krane noted.
“I guess Iran has figured out some creative ways to go” in pricing and selling its crude exports, he said.
However, the most likely option other than the dollar for most OPEC countries probably would be crude pricing based on a specified set or basket of various currencies, according to Krane.
“If you look at the basket of currencies that Kuwait uses for its oil, it would give you an idea of what currencies could be used,” he said.
But even if OPEC members found some positives in moving away from the dollar for oil pricing, that shift likely would result in negative effects for the United States itself, Krane noted.
“OPEC’s cuts are benefiting our oil producers more than anybody else, because we’re producing more oil than anybody else,” he said.
And without OPEC’s stabilizing influence, world oil pricing would become more chaotic and the price of crude would likely fall, Krane said, leading to increased consumption and climate change emissions while U.S. producers suffered economically.
“Does the United States really want cheaper oil?,” he asked.
NOPEC would deter foreign governments from purchasing or holding assets in the United States, and from using the dollar as a reserve currency, Krane observed. It would make it more difficult for U.S. companies to do business abroad.
“I guess you could call it the long arm of American law. It could disrupt commerce a long way outside our borders,” he said.
For all of those reasons, Congress should take a hard look at the possible repercussions and outcomes before considering action on NOPEC, Krane said.
“There’s a privilege to being the country that has the global reserve currency. I guess there’s some rational behavior required,” he said.