On Tuesday, Saudi Arabia's Finance Minister, Mohammed Al-Jadaan announced that they will accept payment for their oil in many different currencies. Thus breaking their exclusive arrangement with the US Dollar that had lasted for half a century.
In the closing months of 1973, America was trying to emerge from the devastating blow of an Oil Embargo. Initiated by the Organization of Petroleum Exporting Countries and led by Saudi Arabia, collectively, these oil-producing countries decided to cut off their largest customer, the United States. OPEC was after higher prices and had failed in their negotiations to win price concessions from the US.
America found itself in an economic pickle. We had descended into recession and found it difficult to pay additional funds to satisfy OPEC's higher prices. And the Saudis et al. were determined to maintain their price. Enter Henry Kissinger, President Nixon's Secretary of State. Kissinger knew that in finance, you either negotiated prices or terms.
So Kissinger took the alternative. He would set the terms. Kissinger said to King Faisal, OK, the United States will accept your price, but you must sell all your oil in US Dollars. And thus was born the famous "Petro-Dollar."
Now I've simplified the terms and conditions somewhat, but throw in some defense agreements and sales of US military equipment, and you get a general idea.
The Petro-Dollar was destined to affect international trade and the US economy profoundly. Kissinger's deal set the US on becoming the World's Merchant. From then on, international finance would set nearly all transactions in Dollars.
For the United States, this was when our country began to change from a production-based economy to a finance-based economy. Want to purchase goods from China, India, or another country? Dollars were the preferred method. And, of course, the petroleum trade worldwide was all in dollars. In short, we were now the world's merchant.
Like your famous shop on Main Street, we have become the place to shop for almost everything worldwide.
You'll remember our discussion of the SWIFT Transaction System, also priced in dollars. And SWIFT, after the past few months, has been dramatically diminished.
Here, I emphasize a point that is often glossed over. As the US became the financial lynchpin of the world, it also began a process of DE-industrialization. And that's no accident. The profitability and ease of entry in finance far exceed any manufacturing plant. Setting up a financial service company is as easy as passing a few regulations, renting office space, and you're off and running. I know I've set up a couple.
Creating a plant to build lithium batteries or computer chips is an entirely different animal. Making the physical plant can be a formidable task, to say nothing of establishing suppliers to provide the raw materials and components.
So the American economy turned to finance. For years, the major employers for the Harvard Business School were financial service companies, from investment and commercial banks to Venture Capital and Funds of all types. Finance had become the place for ambitious Business School Graduates.
However, all that changed this week; after 50 years, Saudi Arabia officially declared that they are willing to accept other currencies in payment for their oil. Saudi Finance Minister Mohammed Al-Jadaan, speaking at the World Economic Forum meeting in Davos, Switzerland, declared:
"There are no issues with discussing how we settle our trade arrangements, whether it is in the US dollar, whether it is the euro, whether it is the Saudi riyal," Al-Jadaan told Bloomberg TV.
That's as big an announcement in the Financial World as you're ever likely to see. Saudi Arabia officially declares the end of the Petro-Dollar as the sole price mechanism for the World's Most Significant Oil Exporter.
Of course, we've been creeping in this direction for nearly a year. First came the expulsion of Russia from the Swift System, then came the personal overtures by China's Xi Jinping to Saudi Arabia just last month. And now a senior official of the Kingdom reports that Saudi will sell its oil in virtually any currency.
It is a shift in global finance, like few, if any, before. And the country most likely to feel the most significant impact will be the US. Moving the Saudi transactions away from the Petro-Dollar will reduce overall Dollar Float. Our country's ability to finance its debt is diminished just when we have increased the amount of debt dramatically.
Further, I expect to see fewer large American “deals” as the role of finance plays a lesser role in our economy, and cheap international financing becomes less readily available.
For 50 years, we've lived off King Dollar, the undisputed epicenter of global finance. Tuesday, Minister Mohammed Al-Jadaan told us those days are over.
Welcome to a period of adjustment.