Earlier this month, Syrian president Bashar al-Assad was welcomed in Dubai, in the United Arab Emirates. To the dismay of the United States, the red carpet was rolled out for him, on the anniversary of the uprising against Assad, amid war mongering by his Russian ally in Ukraine.
A global oil supply shock may be coming
Just before, British PM Boris Johnson has been on a visit himself to both the United Arab Emirates and Saudi Arabia, not only to promote Global Britain, but also in a bid to convince both Gulf states to increase oil production. Johnson was acting as an emissary from the West, after the Gulf countries’ leaders declined to take a call from U.S. President Joe Biden to build international support for Ukraine and contain a surge in oil prices, signalling their unhappiness with the perceived Western lack of support for their security.
These grievances include concerns about Biden’s move to take Yemenite Houthi rebels off of America’s official list of global terrorist groups. Drone and missile attacks on U.A.E. capital Abu Dhabi, launched earlier this year by the Iran-backed rebel group, and the prospect of a restoration of the Iran nuclear deal have added to the U.A.E. and Saudi Arabia’s complaints.
It’s not just refusing to take Joe Biden’s calls, however. More broadly, the Gulf states are hedging their bets on the Ukraine issue. The Emirates abstained during a United Nations vote condemning Russia’s invasion, and the Emirati leader, popularly known as “MBZ”, referred to “Russia’s right to ensure its national security” in a call with Russian President Putin. There has even been speculation that the U.A.E. could help Russia avoid Western sanctions, with Emirati officials reportedly assuring Russians that they will not enforce sanctions unless mandated by the UN — something which Moscow would certainly veto.
On top of that, there is a deal between Russia and the Saudi-led oil cartel, OPEC, which the Saudis and Emiratis are reluctant to abandon, as it was hard-fought in 2020 and involved great concessions from Russia.
The OPEC question will become increasingly important, because the situation on the energy front is dire. The International Energy Agency has warned a global oil supply shock may be coming due to large-scale disruptions to Russian oil supplies, which would drive oil prices to even higher levels than today. While Saudi Arabia isn’t pumping oil at full capacity and has not yet pledged to do so, the U.A.E have promised to push OPEC to pump more oil, but this development has yet to materialize and wasn’t agreed upon with other OPEC members in advance. Despite the talk, actions on the ground further indicate the Emirates are moving away from the West, a shift which is in line with broader trends in the Gulf region.
King dollar no more?
Indeed, the sanctions which have cut off several Russian banks from the SWIFT international payments system and frozen reserves accumulated by the Russian central bank, have renewed debate on the role of the U.S. Dollar as global reserve currency, particularly in the Gulf.
Some have argued that “we are witnessing the birth of Bretton Woods III — a new world (monetary) order centred around commodity-based currencies in the East that will likely weaken the Eurodollar system.” For the moment, however, this remains a minority view, while the general consensus is that there is little alternative to the U.S. dollar in the short- to medium-term.
The West, however, is determined to reduce that trade
The lack of trust in China’s currency should stymy Beijing’s hopes of turning the yuan into a global reserve currency. Gold has proven to be a safe store of value, but despite the fiat money of governments being eroded to finance state spending, gold is not used as a regular payment method. The euro is still plagued by its shaky political underpinnings, while it is still an open question whether bitcoin will be able to resist state action banning it, if it will ever be widely adopted in the first place.
King dollar also retains its primacy due to the fact that oil sales are conducted in USD — at least for now. This week, it emerged that Saudi Arabia is considering accepting yuan instead of dollars for Chinese oil sales.
This is likely to be a bluff, or rather a Saudi cry for attention from Washington decision makers. Switching millions of barrels of oil trades from dollars to yuan every day could unsettle Saudi Arabia’s economy given that the Saudi currency is pegged to the dollar. Aides to the Saudi crown prince have apparently warned him of unpredictable economic damage which could result from moving ahead with the plan. It’s not hard to see how trading oil in a currency plagued by rampant capital controls could easily backfire — meaning that Gulf countries abandoning the imperfect dollar umbrella may soon find themselves in stormy weather.
UK faces “tough” talks with Gulf countries
The continued primacy of the U.S. dollar also makes the argument less convincing that Western sanctions against Russia will push into to a separate trading bloc led by China, creating a kind of dichotomy within the global economy. That is unlikely to happen fast. Not only is China far from enjoying the degree of trust required to offer the world’s reserve currency, it’s impossible for Russia to simply replace its trade with the West with Chinese trade, as the volume of Russia’s current trade with the West is simply too high.
The West, however, is determined to reduce that trade. Ahead of his trip to the Gulf, Boris Johnson vowed the world must “starve Putin’s addiction to oil and gas”, adding that “Saudi Arabia and the United Arab Emirates are key international partners in that effort.” Then, only one day after Johnson’s visit, UAE Foreign Minister Sheikh Abdullah bin Zayed pledged, during a visit to Moscow, to cooperate with Russia on bolstering global energy security.
Johnson’s government seems to be wary to embrace fracking, which before Putin’s war helped the United States enjoy gas prices that are only one sixth of the level in Europe. Unless Johnson revisits that stance, the UK has no choice but to become more energy dependent on the rest of the world, particularly petrol-rich states like the Gulf countries. So far, however, it’s unclear whether they’re ready to play ball. With UK talks with Gulf countries over increased oil production labelled “tough” and the Emirates gearing up to water down the effect of Western sanctions on Russia, something’s got to give.
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