Saudi Arabia’s termination of its 80-year petrodollar deal on June 9, 2024, may reshape global oil markets, as it considers selling oil in currencies like the Chinese yuan, impacting US economic dominance.
According to media sources, Saudi Arabia has chosen not to extend its 80-year petrodollar agreement with the United States, which ended on Sunday, June 9.
Originally signed on June 8, 1974, this pact had been a major contributor to US economic dominance worldwide.
The Birth of the Petrodollar
President Richard Nixon of the United States removed the US dollar’s gold peg on August 15, 1971, thus ending the twenty-five-year-old Bretton Woods monetary arrangement. The US now has roughly 8,000 tons of gold reserves as a result of this action, which was initially characterized as temporary and intended to boost the US economy. This decision, made unilaterally, startled the European people. With the freedom to generate money without worrying about losing gold, the US increased its monetary domination rather than giving up the “exorbitant privilege” of the dollar and switching to a neutral reserve asset.
There were two major oil shocks and high rates of inflation during the 1970s. The Arab oil-producing nations saw Nixon’s decision as a devaluation of the dollar at the end of the 1960s when US oil output briefly peaked. As a result, oil prices skyrocketed, causing problems in the Arab world and, initially, energy shortages in Western industrialized countries.
Nixon’s historic visit to communist China in 1972 was a watershed in Sino-American ties, helping to establish a new kind of cooperation that would eventually propel China’s economic growth. Then, in the middle of the first oil crisis that had a serious impact on the US, newly appointed US Treasury Secretary William Simon took a plane to Saudi Arabia in July 1974. Simon, a former energy expert for Nixon and head of Treasury trading at Salomon Brothers, was an expert in oil and bond markets.
A crucial agreement was reached during negotiations in Saudi Arabia: Saudi Arabia agreed to recycle its petrodollars into US Treasuries in exchange for political and military backing. The petrodollar system was created as a result. From then on, “black gold”—oil—replaced gold as the foundation for the US currency. As a result, to pay for their energy expenses, all nations were forced to keep sizeable reserves of US dollars, solidifying the dollar’s position as the global reserve currency.
Modern-Day Implications
The agreement established joint commissions for Saudi Arabia’s military requirements and commercial cooperation. At the time, US officials thought it would push Saudi Arabia to increase its oil output and forge closer economic relations with the Arab world.
Saudi Arabia can now sell oil and other goods using currencies other than US dollars, like the Chinese RMB, Euros, Yen, and Yuan, because it decided not to prolong this arrangement. The exploration of virtual currencies like Bitcoin for transactions is another topic of discussion.
With this change, the US has made a major departure from the petrodollar system that it established in 1972 when it ceased directly connecting its currency to gold.
It is anticipated to hasten the global trend of conducting international trade in currencies other than the US dollar.
Furthermore, Saudi Arabia has joined Project mBridge, an international initiative investigating a digital currency platform that commercial banks and central banks share.
The goal of this project is to use distributed ledger technology to instantly facilitate foreign exchange and cross-border payments.
Beginning in 2021, Project mBridge incorporates several well-known central banks and organizations from around the globe. It has advanced to the Minimum Viable Product (MVP) stage, where businesses in the private sector are invited to submit ideas and use cases for the platform’s continued development.
Though it is still unclear how this action by Saudi Arabia will affect international trade and finance in its entirety, it signals the start of a significant change in the dynamics of the global economy.
Last year, GreatGameIndia reported that in an interview with Bloomberg TV in Davos, Mohammed Al-Jadaan, the Saudi finance minister, stated that Saudi Arabia, the world’s largest supplier of crude oil, was open to negotiating non-dollar oil trade settlements.
2 Responses
Nobody wants to do business with a rotting corpse! 🤡
nice article