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The USA Must Not Forget That Oil Still Dictates the Order.

Updated: Jan 21

Guest article

Image credits: Energy Intelligence

The Hegemony enjoyed by the USA has been facing a crisis for some time now, and while many consider China to be the main threat, what serves as a more imminent danger is the increasingly volatile Middle East.

With Russian troops marching into Ukraine earlier this year in February, strains were put on the global energy market. The effects were fast to reveal themselves with high inflation and cost of living crisis in many parts of the world. Any hindrance in the energy supply is bound to have a ripple effect all over the global economy. There are many examples that vouch for this fact such as the Yom Kippur War, the Arab Spring and crisis in Libya, and most recently the Russian invasion of Ukraine. However, this particular time, a series of particular reasons make the energy crisis especially dangerous for the USA.

The Outsourcing of Energy Dependence

Oil was first struck in the USA back in 1858 in Pennsylvania by a businessman named Edwin Laurentine Drake. In the years that followed up until the end of World War 2, the USA was self-sufficient as far as Oil demands were considered. What pushed demand for oil beyond domestic supply capabilities was the advent of motorcars and World Wars in Europe.

By the end of World War 2, the US economy was booming and the oil demand surpassed domestic supply limits. In 1945, US President Franklin Roosevelt met Saudi King Abdul Aziz Ibn Saud and secured Oil for the USA from the newly founded kingdom of Saudi Arabia in exchange for protection against hostile neighbours in the Middle East.

Developments in Saudi Arabia

A major foundation of the Hegemony enjoyed by the USA in the post-World War 2 period is the case for the PetroDollar; the sustenance for which was backed by the Saudi Kingdom itself. PetroDollar denotes the oil trade denominated in dollars. Oil is an essential source of energy for every nation, when the trade for oil is denominated in dollars, it further strengthens the power of the dollar as the world’s reserve currency. Furthermore, PetroDollar also ensures that the revenue generated from the oil trade benefits the US economy even if the USA is not a part of the trade. This is because when major exporters of oil like Saudi Arabia earn their revenues in dollars, they are more likely to go ahead and invest this revenue in the treasury bonds issued by the US government creating an influx of cash into the US economy and bolstering it. It is a rather banal fact that the foundations of US-Saudi relations lie on Oil in exchange for Military Aid and protection. The Gulf War provides the best example of this. The foundation of this relationship was based in the mid-20th century, a time when the US was hungry for oil and the latent Saudi Kingdom was anxious about its neighbours. However, things have changed significantly since then in the Middle East. Although its neighbourhood continues to be hostile, the question is whether Saudi still depends solely on the USA for seminal protection against this hostility.

Another crucial development which raises questions about the sustenance of US-Saudi Relations is the rise of the Saudi Crown Prince Mohammed Bin Salman who was recently declared the official Prime Minister of the Nation. There are varying debates regarding the nature of the Prince’s policies with some praising him for a less draconian interpretation of the Islamic Law and others worried about his radical attitude. However, what stands as a crucial observation from the point of International Relations is his alleged involvement in the killing of Washington Reporter Jamal Khashoggi. With the move on Khashoggi, MBS (Mohammed Bin Salman) has perceivably peppered the nose of one of its staunchest allies i.e, The USA. The killing of Khashoggi should be seen as a statement that Saudi is ready to assert its own interests even if it means getting into the crosshairs of Uncle Sam.

The Problems

Image credits: BBC

The Ukraine War and subsequent Energy Crisis have further given MBS the power to dictate his terms in the world order. A major example of this could be his supposed neglect of the Saudi leader at the G20 Summit in 2019 where the Saudi leader was passively ostracised by being shoved to the edge of the group photo and a visible lack of engagement and camaraderie by other state leaders towards him. This event of being characterised as a pariah was followed by the ostentatious ‘red carpet’ welcome on his Europe trip following the Ukraine Crisis in Late July as the demand for oil spiked in the global markets.

It is no wonder that the USA itself is struggling with its sanctions on Russia. Examples of this include a trip to the Middle East and contemplation over the Iranian Nuclear Deal. USA’s pursuit of the Joint Comprehensive Action Plan even at the risk of upsetting its ear in the Middle East i.e, Israel, is a claimant example of how the Hegemony is more or less still floating on oil.

With the recent contemplations by the Saudi Government to trade in Yuan instead of Dollars, the kingdom might be diverging towards China for its military needs. And while China stands efficient to back the Saudi War in Yemen and provides substantial military equipment, does the USA stand efficient to hold its power without the oil? If Saudi was to go ahead and sell oils in yuan, it would aggravate the threat to US hegemony by cutting off the cash influx that PetroDollar invites and further. China is already fast emerging as a threat to be countered with. The Chinese wish to achieve hegemonic status by increasing the reliance of other economies on Chinese exports. An export-heavy economy is heavily energy dependent, given the aspirations of China and its needs, it stands to offer Saudi more leverage on the bargain of oil prices as compared to the USA which has criticised OPEC and Saudi for not slashing oil prices in times of energy crisis.

An absolute change to green energy is to take time. Energy demands however cannot wait. With oil still being the primary provider of this energy, the sanctions on Russia enable Saudi to dictate its terms and possibly threaten the USA. Moreover, the recent desire of the Kingdom of Saudi Arabia to join BRICS further provides an insidious insinuation for a troubled US economy. If Saudi joins BRICS, there exists a huge possibility for bilateral currency swap agreements between Saudi and two of the biggest oil importers in the world i.e., India and China; given the possibility of a bilateral currency swap agreement between the BRICS nations already gaining ground. A bilateral currency swap agreement between China and Saudi will leave China with no incentive for Petrodollar Recycling, this in turn might lead to economic havoc in the USA as China holds over 900 billion dollars worth of US Treasury Bonds. If China was to decrease this petrodollar investment in the US economy, it would eventually increase interest rates in the USA, making credit expensive and stalling business growth.

Recent Developments

The new National Security Strategy of Joe Biden, which sets the mould for much of US foreign policy, is ingenious in the aspect that it prioritises China and the Indo-Pacific as its concerns. However, the USA has a history of complacency, and ignoring the interests of the Middle East might add to that legacy another embarrassment. This history finds support in this new National Security Strategy as well. The NSS which is a comprehensive report on the greater vision of the US foreign policy runs 48 pages with not a single mention of Saudi Arabis or OPEC. This is noteworthy as US-Saudi relations have been amicable and run long in history. This is changing as in a CNN interview following a supply cut by OPEC in October earlier this year, Biden said that there will be ‘consequences’. US foreign policy prioritises China as it finally recognises the threat that the Chinese economy poses to its dominance, however a sense of negligence towards its ties in the Middle East and a lack of empathy for their economy may compel Saudi Arabia into pivoting towards other players which serve its interests best. At the end of the day, every economy relies on oil to power it. As the current world order permutations tell us, Saudi stands as the primary provider of this ‘power ', and the Middle Eastern kingdom has insinuated enough times that it is ready to shift this ‘power’ if its interests are undermined or ignored.

India’s Standpoint

The developments stated above work in India’s favour. There are two reasons for this. At first, the increasing shift of US foreign policy from Russia to China would mean US efforts to aggrandize India as a countervailing force to China in Asia and the Indo-Pacific. Moreover, the addition of Saudi to BRICS would mean a possibility of increased bilateral trade agreements between India and Saudi, increasing the possibility of an oil bargain for India. In the present world order, Indi