The End of the Petrodollar: Unraveling the Future of Global Oil Trade and Economic Power

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The End of the Petrodollar: Unraveling the Future of Global Oil Trade and Economic Power


The announcement of the petrodollar agreement’s end has created ripples across various platforms. For many, this marks a significant event as the petrodollar signifies the historic agreement between the US and Saudi to link Saudi oil sales to the US dollar. With the agreement’s expiration, Saudi Arabia can sell its oil in other currencies thus ending US global economic domination. The news sounds catchy, but the history of the petrodollar and its evolution is far more complex and interesting to delve into.

Initially, it is important to understand that the petrodollar refers to the 1974 secret agreement between the US and Saudi Arabia, which linked the sale of Saudi oil to the US dollar on one hand and to channel the surplus that Saudi gets out of oil sale into US treasuries on the other. This agreement was critical, especially in the wake of the Arab oil embargo that took place in 1973 during the Arab-Israeli war and led to skyrocketing global oil prices.

The petrodollar was a significant agreement that allowed the US to have solid ties with Saudi for five decades. Linking the sale of Saudi oil to the US dollar resulted in having the US dollar as the de facto currency for global oil trading. Most importantly, having Saudi invest its surplus in US treasuries has helped finance the US government deficit for decades, especially in the 1970s and early 1980s, when the Saudi surplus was relatively huge. In return, the US offered Saudi security and military support.

The petrodollar agreement was a critical aspect of global geopolitics and one that shaped the international relations between the US and Saudi along with the Middle East. But in essence, the petrodollar was more about recycling oil proceeds into US treasuries and ensuring a shared destiny between the US and Saudi than just linking oil to the US dollar, though the latter was a component of critical importance in the 1970s when the Cold War was still ongoing. However, with the current global dynamics, the importance of the two aspects of the agreement has changed.

On the linking of oil sales with the US dollar, the agreement ended a few weeks ago, but Saudi is still selling oil in the US dollar. Oil is still quoted and traded globally in US dollar except for a few countries that have sanctions levied on them and have to look for workarounds. So the US dollar is still keeping its global position in oil markets and Saudi will most likely still quote and sell oil mostly in US dollar given the liquidity and convertibility of the US dollar.

On the recycling of Saudi oil proceeds into US treasuries, this part has probably become irrelevant. In the 1970s and early 1980s, Saudi had a relatively huge surplus, where the current account reached 50% of GDP at one point in the 1970s, that its small economy couldn’t absorb and recycling the money into US treasuries seemed like a good investment. But as Saudi started to build its infrastructure and global oil prices declined, Saudi surplus declined and even turned into deficit for a large part of the 1980s and 1990s, minimizing the importance of Saudi investments in US treasuries.

The 9/11 attack created a level of sensitivity in the US against Saudi investments whether in the US stock market or US treasuries. Saudi, then, learned the importance of diversifying its international investments for economic and political reasons. This was truly evident in the 2000s with the increase in oil prices and thus surplus, out of which small amounts were recycled into US treasuries.

Lately, Saudi has adopted a bold vision to transform the Saudi economy and society and this vision has been associated with giga projects across the Kingdom that not only required the deployment of the country’s accumulated resources, but also borrowing in international markets to finance such giga projects, making Saudi the largest global borrower this year in international markets. Saudi still has considerable holdings in US treasuries, but they are not as considerable as the holdings of China and Japan.

The crux of the matter is that the petrodollar agreement end shouldn’t have major implications, given Saudi oil will stay to be quoted and sold mostly in US dollar due to US dollar liquidity and convertibility, while the recycling of the Saudi oil proceeds into US treasuries has become less relevant, given the current low level of Saudi surplus and the huge expansion of Saudi into giga projects requiring the use of all its oil proceeds as well as borrowing in international markets to finance its ambitious vision.

Omar El-Shenety, Managing partner at Zilla Capital and adjunct faculty at AUC School of Business

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