LONDON / DUBAI (Reuters) – Saudi Arabia threatens to sell its oil in currencies other than the dollar if Washington sends a bill exposing OPEC members to US antitrust, three sources familiar with the Saudi energy policy said.
FILE PHOTO: An oil tanker is loaded into Saudi Aramco's refinery and refinery Ras Tanura in Saudi Arabia on May 21, 2018. REUTERS / Ahmed Jadallah
They said the alternative had been discussed internally by senior Saudi energy authorities in in recent months. Two of the sources said the plan had been discussed with OPEC members, and one source informed of the Saudi oil policy said Riyadh had also communicated the threat to senior US energy authorities.
The chances of the US bill known as NOPEC coming into effect are slim, and Saudi Arabia is unlikely to keep up, but the fact that Riyadh is considering such a drastic step is a sign of the Kingdom's annoyance about possible US legal challenges to OPEC.
In the unlikely event of Riyadh disrupting the dollar, it would undermine the status of the world's most important reserve currency, reducing Washington's global trade impact and weakening its ability to enforce national sanctions.
"The Saudis know they have dollars as a nuclear alternative," said one of the sources familiar with the case.
"The Saudis say: let the Americans pass NOPEC, and that would be the US economy that would fall apart," another source said.
Saudi Arabia's Energy Department did not respond to a request for comment.
A state department in the United States said, "As a general matter, we do not comment on expected law."
The US Energy Department did not respond to a request for comment. Energy Secretary Rick Perry has said that NOPEC can lead to unintended consequences.
NOPEC, or the No Oil Producing and Exporting Cartels Act, was first introduced in 2000 and intends to remove sovereign immunity from US antitrust law, which paves the way for OPEC states to be sued to limit production in an offer to raise oil prices.
Although the bill has never made it lawful despite many attempts, the legislation has gained momentum since US President Donald Trump came to the office. Trump said he supported NOPEC in a book released in 2011 before being elected, even though he did not vote for support for NOPEC as president.
Instead, Trump emphasized the importance of US Saudi relations, including the sale of US military equipment, even after the murder of journalist Jamal Khashoggi last year.
A movement of Saudi Arabia to dike the dollar would resonate well with large non-OPEC oil producers such as Russia, as well as large consumers of China and the EU, who have asked to move to diversify global trade away from the dollar to dilute US influence over the world economy.
Russia, which is subject to US sanctions, has tried to sell oil in euro and China's yuan, but the share of sales in these currencies is not significant.
Venezuela and Iran, which are also under US sanctions, sell most of their oil in other currencies, but they have done little to challenge the dollar's hegemony in the oil market.
However, if a prolonged US ally like Saudi Arabia joined non-US oil sellers, there would be a far more significant feature that would likely gain traction in the industry.
Saudi Arabia controls a tenth global oil production, roughly on a par with its largest rivals – the US and Russia. The oil company Saudi Aramco has the crown as the world's largest oil exporter, with sales of NOK 356 billion last year.
Depending on prices, oil is considered to constitute 2 per cent to 3 per cent of the world's gross domestic product. At today's price of $ 70 a barrel, the annual value of global oil production is $ 2.5 billion.
Not all oil volumes are traded in US currencies, but at least 60 percent are traded via tankers and international pipelines with most of the deals made in dollars.
Trading in derivatives such as oil futures and options is mainly denominated dollars. The two global global energy exchanges, ICE and CME, traded a billion tons of oil derivatives in 2018 with a face value of around $ 5 trillion.
Only prospects for NOPEC have already had implications for the Organization of Petroleum Exporting Countries. Qatar, one of the most important OPEC members in the Gulf, ends the group in December due to the risk NOPEC may damage its US expansion plans.
Two sources said that despite raising the dollar's threat, Saudi Arabia did not believe it had to follow through.
"I don't think the NOPEC bill will pass, but the Saudis have" what about "scenarios," one of the sources said.
In the case of such a drastic Saudi movement, the impact will take some time to play out in view of the industry's decades-old practice built around US dollars – from lending to exchange clearing.
Other potential threats arising in the Saudi discussions on retaliation against NOPEC contained liquidation of the state's holdings in the United States, the sources said.
The state has almost $ 1 trillion invested in the United States and has about $ 160 billion in US treasuries.
If it carried out its threat, Riyad would also have to throw the Saudi riyals stick to the dollar, which has been exchanged at fixed rate since 1986, the sources said.
The United States, the world's largest oil consumer, was strongly on Saudi and OPEC supplies for decades – while supporting Riyadh militarily against its archer Iran.
However, changing home oil production has made Washington less dependent on OPEC, making it more powerful in Saudi Arabia and other Middle Eastern nations.
Over the past year, Trump has regularly encouraged OPEC to pump more oil to lower worldwide oil prices and link his demands for political support to Riyadh – something former US administrations have refrained from doing, at least publicly.
Reporting by Dmitry Zhdannikov and Alex Lawler in London and Rania El Gamal in Dubai; additional reporting by Timothy Gardner in Washington; editing by David Clarke