Aramco, The Purge, and the Chinese Attack on the Dollar

By Kevin Freeman
November 06, 2017Nov 06, 2017

There is so much international activity right now that is slipping under the radar of most Americans. While the news has been dominated with stories of whether or not the DNC rigged the primary for Hillary Clinton and also word of the tragic shooting at a Texas church, the geopolitical spectrum is lit up like a Christmas tree.

Over the weekend three very important pieces of the global puzzle were laid on the table. First, we will tell you what those are and then we will do our best to make sense of it all.

First, President Trump put out a tweet asking that the Saudis IPO their Aramco offering on the NYSE (new York Stock Exchange).

Second, the Asian press was discussing how President Trump should arrive with "hat in hand" because we owe China (and much of Asia) so much money.

Trump must tread carefully with his Asian bankers

It's not like the U.S. is flush – it has a $666 billion deficit. Why, then, budget-busting tax cuts that increase inflation risk, imperil credit ratings and irk his bankers?

ASIA TIMES By William Pesek October 30, 2017 10:16 AM

…As China's Xi Jinping digs in for another five-year term – with no heir apparent in sight – Washington's top investor may not be in a giving mood.

Nor might he be very forgiving about tax changes that widen America's budget deficit and threaten the value of Beijing's $1.2 trillion of Treasuries. Trump, after all, has on more than one occasion raised the specter of defaulting on debt to gain leverage in negotiations.

Even before Trump, Beijing had a complicated relationship with the fiscal vulnerabilities its dollar holdings pose. In 2009, for example, then-Premier Wen Jiabao raised concerns about Washington's giant post-crisis stimulus.

"We have made a huge amount of loans to the United States," Wen said. "Of course, we are concerned about the safety of our assets. To be honest, I'm a little bit worried."… [Read the entire article at Asia Times.]

Third, we are witnessing a purge in Saudi Arabia led by Crown Prince Mohammed bin Salman, cracking down on "corruption." We believe that all of this is linked and a part of a serious and deadly global dance.

Royal purge sends shockwaves through Saudi Arabia's elites

Move consolidates power of Prince Mohammed bin Salman as he attempts to reform kingdom's economy and society

THE GUARDIAN, Martin Chulov 

Saudi Arabia's leadership has pulled off its boldest move yet to consolidate power around its young crown prince, Mohammed bin Salman, arresting 11 senior princes, one of the country's richest men and scores of former ministers in what it billed as a corruption purge.

The move sidelined at least 20 senior figures, among them outspoken billionaire, Prince Alwaleed bin Talal, sending shockwaves through the ranks of the kingdom's elites, who had long viewed senior royals as immune.

The scale and targets of Saturday's purge – ordered by royal decree from King Salman – dwarfed anything seen in Riyadh in recent years, deliberately targeting figures deemed previously to be untouchables…. [Read entire article at THE GUARDIAN]

We believe these three things to be deeply interconnected. Here is our preliminary analysis:

The Roots

There are a multiple factors at play but the roots began with a Saudi-led oil war. Back in early 2014, oil prices had been hovering around $100 per barrel and the Saudi budget required that to cover lavish spending and massive entitlement programs for the population at large. When money is so readily available, corruption is likely. The Saudis chose to begin an oil war and had multiple targets:  Russia, Iran, and the United States shale/fracking industry. They were pretty open about what they were doing and why. The Saudis saw Iran gaining hegemony in the Middle East with separate support from Russia and the Obama Administration. In addition, they saw their livelihood threatened as they kept having to lower oil production to maintain the global price. The upstart American frackers were pumping like crazy and America was on a path to energy independence.

So, in 2014 the Saudis started to pump more oil, price be damned, in an all-out oil war. They hoped that this would drive American producers into bankruptcy and de-fund the Russians and weaken Iran. They had done this before and it had worked. This time, however, the Saudi approach seriously backfired. The American shale industry innovated with new technology and lowered their cost of production far below what the Saudis could stomach as a long-term price. Suddenly, America became the swing producer. The Saudis were in a huge budget hole and had to fill the gap by selling down their once vast Treasury bond holdings.

When all was said and done, the Saudis lost the oil war they had started. But it left them in a huge hole financially. Russia became a "strange bedfellow" as Putin had been attacking American fracking already and Russia and Saudi Arabia both desperately needed higher global oil prices. In addition, with the selloff of Saudi holdings of American debt to cover the budget shortfall, all of a sudden the petrodollar concept began to crack, a Putin dream if there ever were one.

With America no longer the largest importer of foreign oil, the Saudis also increasingly must look to China. The Chinese are still very large holders of American debt. But they also have a long-term plan to undermine and displace the U.S. dollar. [While most observers used to argue that the Chinese would never drop the American dollar as primary reserve currency, many now admit that such efforts are underway. They just don't understand why.] The Chinese use a lot of oil and they have to pay for it in American dollars. The leadership resents that. And the Chinese have secretly supported Iran, a nation that shouts "death to America" and has denounced the U.S. dollar. The Chinese are now pressuring the Saudis to dump the dollar.

The Saudis in the meantime have lost their dollar holdings, lost their oil-price leverage against Iran, and found a new connection with Russia. And they need capital. Lots of it. There is a grand $2 trillion diversification plan and it starts by selling 5% of their state-owned oil company for $100 billion. A little bit of pocket change to tide them over.

Initially the thought was to sell the Aramco stake in an Initial Public Offering (IPO) either on the London or New York Stock Exchange. London doesn't seem that interested. Then, there was the thought of offering the stake to China directly. Of course, there were complicating Middle East factors involving Qatar and Turkey which seemed to be out of the Saudi orbit and aligning with Iran.

It was in this environment that President Trump shocked the world with his election a year ago. Few had even imagined he could win. It changed the domestic landscape. Even more profoundly, although perhaps in a less obvious way, the Trump victory altered the global landscape. And the repercussions are being felt in shockwaves right now.

President Trump pushed the Saudis to clean up their act and end funding of terrorists. President Trump "threw a fit" about the Iran deal orchestrated by President Obama. President Trump threatened a "get tough" policy with China. At the same time, the Saudis joined Egypt in calling out Qatar and Turkey for siding with the Muslim Brotherhood and also with Iran. Complicating issues further has been the U.S. push on China to get North Korea to fall in line. Yep, it's complicated. And the Trump Adminsitration appears to have competing factors at work inside of itself with many Obama and Deep-State holdovers working against the more revolutionary Trump approach.

All of this leads up to this past week and sets at least some of the context through which we can view is happening now.

Here are our "educated guess" observations at this point:

  1. The Saudis are using the threat to the dollar to force American participation in their Aramco IPO. If we don't invest the $100 billion in their state-owned oil company, they will turn to China and agree to end the petrodollar system, removing one more prop under our reserve currency status.
  2. The Chinese are using the opportunity to lock in a steady supply of oil and at the same time remove American smugness regarding the dollar. In fact, in one fell swoop, they can eliminate two of the most potent economic weapons ever used (access to oil and the hegemony of a reserve currency). This would be an extension of the one belt/one road policy.
  3. The Russians are using the opportunity to gain influence in the Middle East, especially with a previous adversary, the Saudis.
  4. The Saudis are hoping to further isolate Qatar, Turkey, and Iran.

In short, this is global economic warfare at the highest levels. And it is not without a kinetic response. We are seeing war brewing between the Saudis and Iran-proxy Hezbollah. There are missiles fired from Yemen and threats of war with Iran. All of this happening at once is not coincidence.

From our perspective, it is a little early to tell if the purge in Saudi Arabia is a long-term net positive or negative for America (although initial reports claim President Trump's blessing). Some would argue that the purge removed elements that would stand against an Aramco deal with China, following a Putin and Xi roadmap, and perhaps ultimately paving the way for an assault on the dollar. On the other hand, others view the purge as removing radical elements and favoring the American position. Coupled with the move against Qatar, Turkey and ultimately Iran this is seen as supporting a more moderate Islamic approach that is pro-West and businesslike. Both sides make passionate arguments. Only time will tell which view, if either, is correct.

In regard to the President's pro-Aramco IPO tweet, we have serious reservations. Is this a signal that the new Saudi Arabia is squarely on our side as some might suggest? Given the recent cozying with Russia and China we have reason to be doubtful. Is this President Trump trying to head off an attack on the dollar? Or, is this President Trump simply wanting to win a deal for America?

If the push for an Aramco IPO in New York is designed to protect the dollar, there are better ways to do that. One would be to explain to the Saudis that dumping the dollar now would have serious negative repercussions for them, far beyond what they may be imagining. If oil were priced in another currency, American energy producers would be freed substantially to take over as the top global producer. This was unthinkable a few years ago when oil exports were outlawed, our domestic supplies viewed as limited, and our cost of production far above that of the Saudis. But things have drastically changed.

The export ban has been lifted. Thanks to technology, our recoverable oil is far greater than we could have imagined. And, we can produce a barrel of oil for far less than the Saudi budget requires for break even. So, if the Saudis dumped the petrodollar, we would no doubt suffer some serious economic consequences. But we would also take advantage of a weakened dollar to gain substantive global oil market share. Oil would seem cheap to buyers with the weaker dollar but our producers would get paid nicely. The Saudis would lose control quickly. China would own Aramco in short order (or control it at the very least). Making Saudi Arabia aware of these facts might give them great pause before attempting any anti-dollar move.

I would make the argument to President Trump that he has already placed us in the much stronger position in regard to Aramco. Our economy has strengthened. Repatriation of corporate earnings would solidify the dollar. Regulatory reform has unleashed energy productivity. Therefore, we should not allow an IPO in New York UNLESS the Saudis genuinely clean up and clear out all material support (or any support) for terrorism. The effort against the Muslim Brotherhood has seemed to be a decent start. The effort against Iran is promising as well. But will they follow through regarding radical Wahhabism? Are they capable of truly rejecting terrorism?

The second demand prior to an Aramco IPO must be full transparency and true minority shareholder rights. We should not even consider allowing any American money into a Saudi-government controlled company where the rights of the investors are not respected. We made this mistake with Alibaba and the Chinese already. Only time will tell how much that will cost us. We have already seen Alibaba use our money to buy up Silicon Valley companies and place them under Chinese ownership. Remember, buyers of the Alibaba IPO did not receive shares in the Chinese company. They received shares in a Cayman Islands company that has a contract with Alibaba. We cannot let the Saudis pull a similar trick.

Finally, the deal must make economic sense for the buyers. Asking $100 billion for a 5% stake seems more than a bit rich at this point, especially when we have a thriving domestic oil industry. The whole of the company is thus valued at $2 trillion. Is it worth that as oil seems much more plentiful, prices are down, and long-term usage at least subject to question with electric cars?

In addition, I would explain to President Trump that even if the Saudis had us over a barrel regarding the IPO and the risks to the dollar, what assurance would we have that they wouldn't return us to the same position after the IPO ended? They could always offer another 5% to China with the same threat to displace the petrodollar. That's how blackmail works. You never stop paying. And that brings us to the crux of the matter.

The weekend purge removed Saudi prince Alwaleed bin Talal who headed Kingdom Holdings. He has been viewed as a connector to Western finance as Kingdom Holdings holds sizable stakes in Citigroup and 20th Century Fox. But he also was the one who publicly declared that after an IPO, the Saudis could offer another 5%, possibly to China. Was he removed because of corruption as the official statement declares? Or, was he a proponent of closer ties with China? Or an opponent? We have never been fans of Alwaleed bin Talal for multiple reasons so it is hard to see his inclusion in the purge as something bad.

We have solutions for China as well. We do not have to be in a position of weakness. In fact, if we stop their Intellectual Property theft and forced technology transfer, we can retake some of the economic growth they have been stealing from us. The Chinese should be shown that cooperation with America is in their interests. To make the case, however, requires a very strong domestic economy combined with a robust military capability. And, we must prepare for conflict if required.

We will be watching developments closely and maintain regular contact with source experts in all these areas.

What Should You Take Away From This?

Regardless of how things shake out, the reality is that the global economic war is intensifying. Things we have been discussing for years are unfolding before our eyes in the vein of Biblical prophecy. Much more important than the economic aspect, this is truly a spiritual war for the future of Western Civilization.

To gain perspective, check out this latest Ginni Thomas interview with our friend Ken Abramowitz.

Ken was in the first-class faculty of the NSIC Institute that we hosted. He also includes our book, Secret Weapon, on his recommended reading list at Ken's key points are a critical understanding.

[Keep in mind that if this is a spiritual battle (and it is), the only way to win is with a spiritual solution. Thus, we continue to point you to 2 Chronicles 7:14. It's time to cry out to God on behalf of our nation!]