In a ‘strategic’ move, oil-producing giant – Saudi Arabia on June 9, 2024, decided to walk away from its 80-year petrodollar deal with the US, giving the oil-producing nation a upper hand in exploring strategic relations with other currencies. The petrodollar deal was an agreement made between Saudi Arabia and the United States to use dollar revenues from oil sales to the United States to buy US Treasuries. But even if this sounds very easy to understand, the agreement history is far more complicated.In 1974, during the Nixon administration, the United States faced high inflation, large deficits, and an oil crisis. The country ended the gold standard, leading to floating exchange rates. Amid economic uncertainty and the Watergate scandal, the US struck a deal with Saudi Arabia. In exchange for military support and security, Saudi Arabia agreed to sell its oil exclusively in US dollars and reinvest those dollars into US Treasury bonds. This deal helped stabilize the dollar, promoted its use in global trade, and strengthened the US economy.
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Fast forward fifty years, the US’s dominant global position has weakened. Its share of the world economy has decreased, and China has grown significantly. The US now competes with China for global influence. Many countries, including US allies, are looking for ways to reduce their dependence on the US dollar due to America's frequent use of economic sanctions.
The US no longer relies heavily on Saudi oil due to its own oil production surge. Meanwhile, China has become Saudi Arabia’s biggest oil customer. Saudi Arabia is also looking to diversify its international relations and currency use. This includes joining the BRICS group of emerging nations and exploring digital currencies for cross-border payments.
Countries are gradually moving away from the dollar, using their own currencies for trade to avoid relying on the US. Although this shift comes with some costs due to less efficient local currency markets, advances in digital payment technologies could reduce these costs in the future. Tokenized currencies, like central bank digital currencies (CBDCs) or stablecoins, could make international transactions faster and cheaper, lessening the need for the dollar.
While the dollar’s dominance will likely continue, the global financial landscape is becoming more balanced. More local currencies could be used for international transactions, with the dollar remaining important but sharing its influence with other currencies like the Chinese renminbi (Yuan), the Euro, and the Japanese Yen. How Saudi Arabia manages its oil sales and currency choices will be crucial in shaping this financial future, just as it was fifty years ago.
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