Moneybeat - Saudi Arabia plays the China card

MARY REICHARD, HOST: Next up on The World and Everything in It: the Monday Moneybeat.

NICK EICHER, HOST: Time now for our regular conversation on business, markets, and the economy. Financial analyst and adviser David Bahnsen is here. Morning, David.

DAVID BAHNSEN, GUEST: Good morning, Nick. Good to be with you.

EICHER: Interesting Dividend Cafe this week, David. There’s a story you think is being overlooked in all the reporting on Ukraine and Russia and that’s China and Saudi Arabia. The news that China’s president Xi Jinping may be paying a visit to Riyadh and that Saudi Arabia may start oil sales to China, not denominated in what we know as “petro-dollars” but in Chinese currency. What are the implications of that for the global economy, should that start happening?

BAHNSEN: Well, one of the great embedded advantages to the dollar is that the largest commodity in the world - oil - is denominated in dollar terms. It's not 100%, but it's, you know, well, over 80% of what we call ‘Petro dollars’ is basically the requirement that people who are buying oil, whether they're buying it from the U.S., or OPEC, essentially are paying in U.S. dollars. So that gives the U.S. a lot of leverage, because other countries have to convert their currency to dollars to transact in oil markets, and everybody needs oil. And so it is a reinforcement mechanism of the dollar as the world's reserve currency. The quid pro quo was, you Middle Eastern countries transact in dollars, and there's an implied security protection. People can agree or disagree with some aspects of  US - Middle Eastern policy, but when we put 500,000 U.S. troops in Saudi Arabia in 1990, when Saddam Hussein invaded Kuwait, there was a reason, and a good portion of it was part of the kind of policy arrangement that was in place about Petro dollars.

EICHER: This emerging economic relationship between China and Saudi—is this growing out of very recent events or do you see it as having been brewing for awhile?

BAHNSEN: Oh, it's absolutely been brewing for a while, what you have, historically, is a step back in U.S.-Saudi relations after 9/11. But still some maintenance of this civility. And then the U.S. fracking revolution, at the end of that decade, totally changing the economic leverage that Saudi had. And then the U.S. with the Arab Spring, really kind of abandoning allies in Egypt, with the civil war in Syria, basically, not, the U.S. kind of stayed out of it. And Saudi previously would have expected the U.S. to be more supportive of removing the very anti Saudi, who, by the way, was very pro Russia, Syrian forces, right. And then, of course, there was the killing of the journalist there in Saudi Arabia, where the American government officially declared Saudi government to be responsible. So all in just 10 years, you've had all of these things percolate. And ultimately, one of the biggest acts of aggression was what took place in March and April of 2020, that I talked about on this very show with you at the time, where Saudi was complicit in flooding the world oil markets, and helping to completely collapse the oil and energy sector back at the beginning of the pandemic. So, no, I think this has been percolating for quite a while. And I think Saudi has limited cards to play. But forming an alliance with China is one of the most effective cards they could play now.

EICHER: All right, David Bahnsen, financial analyst and advisor. Head of the financial planning firm The Bahnsen Group.

You can catch David’s daily writing at DividendCafe.com. Sign up there for his daily email newsletter on markets and the economy. David, thanks again!

BAHNSEN: Thanks so much, Nick.

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