End of Saudi-U.S. Petrodollar Pact Signals Potential Decline of Dollar Dominance
Image Credit: Timeline Daily
The petrodollar agreement, or we can say collaboration, between the United States and Saudi Arabia came to an end on 9th June. This could be the end of the global dominance of the U.S. dollar in the world market, as per various economists.
What is the petrodollar? It refers to the dollar’s role in the purchase and sale of crude oil in the international market. This came into force in 1973 when the world was facing a severe oil crisis, and in the wake of this crisis, Saudi Arabia agreed to conduct all oil transactions in U.S. dollars and invest its oil surplus funds in U.S.
Treasuries in exchange for U.S. military support. Due to Saudi Arabia’s dominance in oil exports throughout the world, the global oil transactions were priced in dollars, which ensured a constant demand for dollars. As the demand for dollars was high, the U.S. Federal Reserve could print more currency and issue more treasuries than it could have otherwise.
At present, the Kingdom is still accepting U.S. dollars for oil exchanges, but most of the world’s largest economies are attempting to change this scenario. China is pushing its yuan for the oil purchase and sale throughout the Middle East. India and Russia had agreed in the past to do oil transactions in local currencies.
After the petrodollar agreement wasn’t renewed, the very next day, the Moscow stock exchange stopped trading in U.S. dollars and euros. If this situation continues, then the U.S. will print more dollars, and inflation would rise throughout the country. It somehow seems bullish for gold, bitcoin, stocks, and real estate, as the demand for gold would increase in the near future due to its global stability.
According to the digital news service Sputnik, “Nearly 80 percent of global oil sales are priced in dollars. However, Russia, Iran, Saudi Arabia, China, and others are increasingly shifting to local currencies in energy trade. In 2023, 20 percent of global oil was bought in other currencies, as per the Wall Street Journal.”
The U.S. understands too that they have to maintain a strong relationship with Saudi Arabia as it is one of the top suppliers of crude oil to the U.S. But some economists claim that the breakdown of the petrodollar agreement will not hit the U.S. economy too hard as the majority of the revenue generated by crude oil sales in Saudi Arabia is by default going to be converted to U.S. dollars as Saudi seeks the majority of its military imports from the United States and most countries are still using the U.S. dollar for trade because of its stability, more than any other currency in today’s world.
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