The news that Saudi Arabia has decided not to renew a supposed agreement with the United States that compelled it to sell its oil in dollars has gone viral online and in the alternative press, sparking debates about the possible decline of the dollar as the world’s reserve currency, while pundits in the mainstream media dismissed it as fake news.
The information that went viral online and was repeated by some media outlets last week stated that on 9 June 2024, Saudi Arabia had not renewed its 50-year petrodollar agreement with the United States, according to which it had to sell its oil exclusively in US dollars and invest its surplus in US Treasury bonds.
The debate has focused on the fact that this development may accelerate the de-dollarisation trend, whereby countries seek to reduce their dependence on the US dollar. Thus, further weakening the dollar’s hegemony as the world’s reserve currency and accelerating its decline.
The mainstream media simply ignored the story or dismissed it as “fake news“, citing experts such as Paul Donovan, chief economist at UBS Global Wealth Management, who claims there was never a formal agreement requiring Saudi Arabia to price its crude oil in dollars. Furthermore, Donovan explained, that after the 1974 joint economic cooperation agreement was signed, Saudi Arabia continued to accept other currencies, such as the pound sterling, and it was not until later that year that the Kingdom stopped accepting the pound as payment currency.
Yet, other commentators have also come out lending credibility to the alleged deal: “Since the 1970s, the US has been pressuring Saudi Arabia to sell its crude oil in dollars to protect the dollar’s status and demanding that Saudi Arabia buy US bonds and weapons,” said Shigeto Kondo, senior researcher at the JIME Center of the Japan Institute for Energy Economics.
Let’s review a bit of history
The dollar’s status as the world’s reserve currency predates the creation of the petro-currency known as the petrodollar, essentially, oil export revenues denominated in US dollars. That said, we must acknowledge the financial flows, known as petrodollar recycling, whereby the money that Western countries spend buying oil ends up flowing largely back into the US economy through financial investments or the purchase of debt by energy producers.
It is true that this currency pattern established in 1973 was not born out of a contract or a treaty, but out of an agreement, let us call it implicit, initially between the United States and Saudi Arabia and later extended to other OPEC countries, according to which the oil-producing countries agreed to sell their oil in dollars in exchange for protection from the American partner and to reinvest the surplus from oil exports in buying US weapons and debt through Treasury Bonds.
In other words, after an oil crisis called into question the future of the dollar as a reserve currency, especially after France, Germany and other countries cashed in their dollar reserves, the US military became a mercenary military force for theocratic regimes in the Persian Gulf in exchange for ensuring that the dollar remained the currency of choice for oil purchases around the world, perpetuating its demand and value.
This recycling of petrodollars creates an almost unlimited demand for the issuing country’s debt, which allows the US to print large amounts of money (debt) without consequences. Moreover, any leader from this region who has opposed selling his oil in US currency – as Saddam Hussein and Muammar al-Ghadafi did – has been considered a direct threat to the petrodollar, i.e. to US hegemony. These countries were then subjected to a military intervention, which “coincidentally” led to the resumption of selling their oil in dollars.
The reality of a multipolar world
Ultimately, it is irrelevant whether there was a formal agreement between the two countries to use the dollar as the oil trading currency. The global geopolitical and economic context in the 1970s was much different than it is today. The dollar had emerged as the “de facto” reserve currency before any agreement was signed and there was no real alternative.
Today, however, we find ourselves in the context of a multipolar world that is spurring a necessary and inevitable rebalancing of the world order and does not require the expiry of a 50-year-old agreement. At the 2023 Davos Forum, Saudi Arabia’s finance minister, Mohammed Al-Jadaan, announced that the kingdom was open to accepting local currencies for oil trading and reaffirmed his decision on a visit to India last September. Oil sales in other currencies are no longer a novelty.
Over the past two decades, the dollar has gone from accounting for more than 70 per cent of global official reserves to 58 per cent today, according to IMF data. This is not to say that it is in any imminent danger of losing its status as a global currency, far from it, but it is undeniable that its days are numbered. Its supremacy as a trading currency and the hegemony it gives to the United States are being eroded year by year.
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