This “Fake News” Was Actually Real

We need a new word, or a new term, for something that’s a fake but actually real…

Maybe it’s “faux fake”? A fake fake…

I’ve come to this determination after the events of last week.

News popped up in various legitimate places that the Saudi government had allowed a 50-year contract with America to lapse in early June…

That contract was the Saudi promise to only sell oil in US dollars.

Thing is… no such contract ever existed.

So the news, apparently originating somewhere in India, was fake.

But the other thing is… this bit of fake news is actually real.

At least in practice.

Here’s what I mean…

While no such formal US/Saudi agreement ever existed in the first place, the oil market really is moving away from the dollar.

Saudi Aramco, one of the world’s largest oil companies, inked two deals last year to supply 690,000 barrels of oil daily to two Chinese refiners. Separately, Beijing’s in talks with the Saudis to price that oil in yuan, not dollars, and the Saudis are reportedly interested in doing so.

Meanwhile, Russia, another meaningful exporter of not just oil but a wide range of commodities, is now selling those commodities to China in yuan.

On top of that, India is trading oil with the UAE in rupees, and is in talks with Saudi Arabia to trade oil in rupees and riyals. Other nations are reportedly interested in buying oil in yuan on China’s Shanghai Oil and Natural Gas Exchange.

Like I said, the fake news was fake, which means it was real. Sort of like adding two negative numbers to end up with a positive.

Now, will the Saudis ever fully move away from the dollar?

Probably not.

Saudi Arabia needs America as a military ally. The country’s brand of Islam—an extremist, conservative version of Sunni Islam called Wahhabism—is antithetical to much of the Islamic world, particularly in Iran, home to the Shia brand of Islam.

So, USD will always have a role in oil sales.

But…

Times do change. And as the plot points above indicate, they already are a’changin’.

Of course, most folks don’t care, and with good reason. No one has time to think about currencies and the oil markets on the other side of the planet. It’s not on most people’s reading-to-do list. Saudi Arabia is far away from the US, and most folks in the world care about oil only to the degree that prices push and pull on what they pay at the gas pump.

Alas, whether or not oil is sold in dollars does have a forceful impact on your wallet and the American economy.

Any process that requires other countries to buy dollars to make purchases elsewhere in the world is a process that keeps the US dollar’s value artificially higher. It’s just the math of supply and demand.

If everyone needed a box of Junior Mints to pay for access to the interstate during morning and afternoon rush hours, well, the price of Junior Mints would surge because of forced demand for them.

Same with oil and dollars.

If Colombia wants to buy oil from Nigeria, it doesn’t do so in pesos and naira. Colombia sells pesos to buy dollars. That’s unnatural buying pressure on the dollar. And if you spread that concept across all oil sales in the world every day, then you realize how much demand there is for the dollar that otherwise would not exist.

Let’s say the world consumes about 100 million barrels of oil per day, and the price of oil right now is roughly $80 per barrel. That would be $8 billion in oil sales globally… meaning an $8 billion demand for greenbacks every day, or thereabouts.

Take that away and ripples spread through America.

As we all know at this point, Uncle Sam is the most heavily indebted nation in the history of nations. We won’t recount that sad tale here.

Because of all that debt, America needs to sell oodles and oodles of Treasury paper to repay all the oodles of old Treasury paper it sold in the past to keep the lights on in America.

As demand for dollars declines, demand for Treasury paper declines. But America’s need to sell Treasury paper does not decline. It actually rises.

Falling demand for Treasury paper means the US has to offer higher interest rates on its debt to attract the buyers it needs in order to sell as much paper as America needs to sell.

But when you’re selling debt just to pay for the debt on the previous paper you sold, then those rising rates on your new paper means you have to sell more new paper to afford the higher interest payments… which means selling ever-more new paper in the future.

You can see how a debt tornado begins to spin out of control.

All tornadoes start small, a bit of warm air rising as cold air descends. But in the right conditions, that tiny seed of swirling air emerges as a windstorm that destroys lives and communities in minutes.

It’s no different with countries slowly moving away from the dollar in the sale of oil, or anything else really. It means reduced demand for dollars, which pushes up the ongoing cost of refinancing America’s debt.

And the sweet little cherry on top is that falling demand for the dollar means the value of the dollar falls too on international currency markets. Again, it’s just a supply/demand thing.

And when the dollar falls in value, then the cost of living in America rises because the price for all imported goods and commodities goes up for America’s consumers and manufacturers.

So that’s the faux-fake news you need to know.

Sure, there was no 50-year agreement to price oil in dollars.

But the world is moving away from the dollar all the same.