Recently, the term “petrodollar” has frequently surfaced in economic discussions and news headlines, sparking considerable controversy over its outlook. This surge in interest comes amidst emerging rumors that suggests Saudi Arabia may end its 50-year Petrodollar agreement with the U.S. to price oil exclusively in U.S. dollars. 

However, this news has sparked skepticism, with some questioning on its validity and dismissing them as potential fake news.  

In this article, we will explore the origins of the petrodollar and set forth the current controversies that challenge its stability. We aim to provide a detailed analysis of the possible developments that may significantly affect global economic policies and practices should this prove to be true. 

Petrodollar: Clarifying a Common Misconception 

The term “petrodollar” emerged in the 1970s, a defining decade for energy economics and international currency stability. Contrary to what the name might imply, a petrodollar is not an actual currency. Instead, it refers to U.S. dollars that oil-exporting countries accrue through the sale of oil. This monetary flow plays a critical role in the global economic system, significantly influencing currency stability and international trade dynamics. 

Historical Context of the Petrodollar 

The development of the petrodollar system was driven by economic necessity and geopolitical strategy during the turbulent 1970s. The creation of this system was catalyzed by several key events: the collapse of the Bretton Woods system, the 1973 oil crisis, and the consequential U.S.-Saudi agreement. Each event underscored the importance of securing stable economic fundamentals amid global uncertainties. 

• Bretton Woods Collapse: Established in 1944, the Bretton Woods Agreement created a system of fixed exchange rates anchored by the U.S. dollar, which was convertible to gold. The agreement fostered much-needed post-war economic stability but collapsed in 1971 when President Nixon ended the dollar’s convertibility to gold.  Major currencies began to float against each other in 1973. 

• The 1973 Oil Crisis: The dynamics of global oil changed drastically during the Yom Kippur War when the Organisation of Arab Petroleum Exporting Countries (OAPEC) imposed an oil embargo against the U.S. and other nations supporting Israel. This embargo significantly reduced oil production and export to these nations, consequently triggering a sharp increase in oil prices. 

• U.S.-Saudi Agreement: In 1974, amidst an escalating oil crisis and soaring prices triggered by OPEC sanctions, Saudi Arabia agreed to accept dollars as the sole payment currency for its oil in exchange for U.S. military support, equipment, and security assurances from the United States. This arrangement not only ensured a continuous supply of oil to the U.S. but also created a robust market for U.S. debt. In return, Saudi Arabia received vital security guarantees and economic support, reinforcing its geopolitical stability and economic growth. 

Current Rumors and Sources 

So, what is this petrodollar “deal” that is under threat?   

The term “petrodollar” has recently come back into focus, sparking debates due to reports of potential changes in the long-standing financial agreement between Saudi Arabia and the U.S. These reports, which mostly came from sources in India and publications targeting cryptocurrency investors, have escalated prompted responses from economic analysts like Paul Donovan of UBS.   

The 1974 Milestone Pact

In the center of the debate is news from June 1974, which has resurfaced as purported “proof” by various sources to validate claims about the existence of a 50-year petrodollar agreement. According to information provided by Paul Donovan, the U.S. and Saudi Arabia did indeed establish a Joint Commission for economic cooperation that year. The primary purpose of this commission was to help Saudi Arabia manage its sudden surplus of dollars by facilitating investments in U.S. products. Further solidifying these economic ties, in July 1974, Saudi Arabia confidentially agreed to invest oil dollars in U.S. Treasuries, a fact that remained undisclosed until 2016. 

This historical arrangement is often cited inaccurately by those claiming that the petrodollar system was a formal and fixed agreement set to expire after 50 years. However, the trading of oil in non-dollar currencies has not been uncommon. In January 2023, it was acknowledged by Saudi officials that they were open to negotiating oil sales in currencies other than the U.S. dollar. According to Donovan, such shifts are of little consequence to the financial markets, given that the Saudi riyal remains pegged to the dollar and the majority of Saudi Arabia’s financial assets are still dollar denominated. 

Upon review, the New York Times article dated June 9, 1974, highlights a significant military and economic agreement signed on June 8, 1974, between the U.S. and Saudi Arabia, marking the first of such agreement between the U.S. and an Arab country. This pact was celebrated as a milestone in fostering closer bilateral cooperation, aiming to boost Saudi oil production and setting a model for similar partnerships with other Arab nations. The agreement included the formation of two joint committees to enhance economic collaboration and address Saudi military requirements.  

Although U.S. Secretary of State Henry Kissinger and Saudi Prince Fahd bin Abdulaziz indicated that Saudi Arabia would price its oil exports in U.S. dollars and invest excess oil revenues in U.S. Treasury bonds in return for U.S. military support and protection, it is important to note that there was no formal stipulation for oil transactions to be exclusively in dollars. Moreover, no official records suggest that this agreement was intended to expire on June 9, 2024, challenging the assertions that have recently surfaced regarding the 50-year duration of the petrodollar arrangement. 

Implications for the U.S. Currency 

Saudi Arabia’s gradual shift to using other currencies besides the U.S. dollar for oil sales, along with its new economic ties with countries traditionally not aligned with the U.S., could weaken the dollar’s strong position globally. This signals a potential weakening of the U.S. dollar’s dominance, pointing to a growing challenge to the U.S. currency. 

Saudi Arabia’s Shift Away from Dollar 

Recent geopolitical changes have put a spotlight on Saudi Arabia’s changing approach to the petrodollar system. In January 2023, the Saudi finance minister publicly acknowledged that the Kingdom was willing to use currencies other than the U.S. dollar for trade, a significant change from their previous stance in 2019. This statement marked an end to the long-held rumors of Saudi Arabia moving away from the dollar. 

Throughout 2023, these policy shifts became more apparent. By mid-year, Saudi Arabia had started to import large amounts of fuel oil from Russia, strengthening their trade relations and leading to increased use of non-dollar currencies, especially as the U.S. tried to limit Russia’s access to the dollar-based economy. In November 2023, Saudi Arabia and China furthered this trend by signing a currency swap agreement to boost the use of their local currencies, reducing the dollar’s sole dominance in international trade. 

Global Engagements and Diplomacy  

While these individual events are noteworthy, their full significance becomes clear in the larger geopolitical landscape. For instance, Saudi Arabia’s decision in March 2023 to re-establish diplomatic ties with Iran through a deal brokered by China—despite U.S. preferences—signifies a major shift away from U.S.-led foreign policies. Although the U.S. officially praised the deal, it was not well received by Israel, showing a divide in regional interests. 

By September 2023, think tanks like Stimson had verified that Saudi Arabia’s move away from the dollar was part of a broader strategy to increase its diplomatic independence with major global powers like China and Russia. This indicates a shift towards a more balanced global power structure. 

Saudi Arabia’s strengthened ties with the BRICS nations and its cooling relationship with the U.S. were further highlighted by Crown Prince Mohammad bin Salman’s decision to skip a G-7 summit to stay in Mecca, although he made sure his foreign minister Nizhny Novgorod attended the BRICS summit in Russia shortly afterward.

The Future for the Petrodollar? 

These developments do not immediately signal an overhaul of the dollar economy or an end to U.S. influence in the Middle East. However, they are indicative of a gradual yet significant decline in U.S. control over global currency markets and geopolitical order. Saudi Arabia’s moves suggest a strategic recalibration of its alliances and economic policies, reflecting a worldwide trend towards a more diverse and balanced global political and economic landscape. 

While the immediate impact on the petrodollar may not drastically alter the global economy, the evolving trends indicate a significant transformation over time. For the U.S., adapting to this changing landscape will be crucial in maintaining economic stability and global influence in a multipolar world.

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