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The Saudi Arabia and U.S. Deal to Destroy the Dollar

Written By Geoffrey Pike

Posted February 12, 2016

houseofsaudPerhaps this is an unfair stereotype, but when people in the West are asked about politics and the Middle East, there are two things that come to mind: war and oil. You might be able to add terrorism to the list, but that fits in with war.

War is terrible for any country or society. It not only takes a lot of life, but it makes for a much harder life for those who survive. If you ever get depressed about your investment portfolio going down by a lot, just think that your house and place of work are not in a war zone. You don’t have to live in fear of your house being bombed or becoming a battleground.

There is no question that war has been devastating for countries in the Middle East where the people have had to endure it or flee.

On the other hand, oil has been a bright spot in the Middle East, at least for some. It just so happens that a good portion of the world’s oil comes out of the ground in the Middle East. It is not just a factor of the region having a lot of oil, but the fact that the oil is easy to extract from the ground.

But while oil is a seeming bright spot, some would argue that it is the region’s biggest curse. If the cheap oil didn’t exist there, then maybe the ongoing wars wouldn’t exist either.

Also, consider that much of the oil revenue goes disproportionately to the elite ruling class. The House of Saud is a great example, where the ruling family enjoys billions of dollars in wealth. And while the people living in Saudi Arabia enjoy living standards that are better than some in the world, they are essentially being ripped off by the ruling family.

Even worse, the House of Saud uses this wealth and power through its control of oil to suppress the population. The House of Saud and the U.S. government use the resources in their control to aid each other, which actually hurts the populations of the respective countries.

The U.S. government backs Saudi Arabia, particularly militarily. Without support from the U.S. government, the House of Saud would likely fall. Meanwhile, the Saudis agree to trade oil in U.S. dollars, thus propping up the dollar in world trade.

Saudi Arabia relies on much of its growth from the sale of oil. Right now, the Saudis are constructing what is supposed to be the tallest building in the world. The Jeddah Tower will stand at a height of over 1 kilometer.

A Disastrous Perfect Storm

When the new world’s tallest building is complete, it will be quite a view from up there. But the view may be looking down on a region that is experiencing major troubles.

The World Bank recently stated that economic growth in 2015 for the Middle East and North Africa will likely come in at just 2.6 percent, as compared to the predicted 2.8 percent. The main reasons stated for the lower than expected growth are war, terrorism, and lower oil prices.

In terms of war, it is obvious that Iraq and Afghanistan continue to be war-torn regions. But Syria has also seen its share of major warfare over the last several years and Yemen has also suffered from war (ironically, from bombings from Saudi Arabia). It seems that places living in peace are almost in the minority in the region.

While war almost always seems to be going on in the region, it has been far worse than normal over the last several years. And if you include North Africa in the mix, consider that Libya has been in chaos since the U.S. government ousted Gaddafi in 2011.

With war going on all around, now you can add cheap oil to the mix. It was the Saudis who dictated OPEC’s policy of not cutting back oil production. Many thought the Saudis were doing it to hurt the Russians or to bankrupt shale oil projects in the United States. It is possible these theories are correct. But what is quickly becoming evident is that the lower oil prices are hurting the Saudis probably as much as anyone. I’m not counting Venezuela, which would be an economic basket case with or without low oil prices.

So between war and low oil prices, the major exporters of the region are really hurting. This includes Saudi Arabia, Qatar, Kuwait, and the United Arab Emirates (UAE). The UAE will likely come out of this better than the others because the country does not rely as heavily on oil revenues. Much of the wealth in the UAE comes in the form of tourism and as a global financial center for businesses.

According to the World Bank, Saudi Arabia’s public debt will continue to increase with oil prices staying down. And while Saudi Arabia and the other major oil exporting countries do have reserves to overcome deficit spending, those could be drained quickly if the lower oil prices are sustained.