The 50-year-long petrodollar agreement between the Saudi Arabian government and the United States has come to an end. This agreement, signed on June 8, 1974, established the practice of Saudi Arabia selling petroleum products exclusively in US dollars. However, with the decision not to renew the contract, Saudi Arabia now has the option to sell oil in currencies of other countries as well. Experts predict that this move by Saudi Arabia will diminish the global dominance of the American dollar and bring about significant changes in the global economy.
The petrodollar agreement, signed in 1974, solidified the influence of the US dollar in the international market. Before 1971, the value of the US dollar was tied to the price of gold. Under the Bretton Woods agreement, the price of gold was fixed at $35 per ounce. However, when President Richard M. Nixon ended this arrangement, the value of the dollar declined. This prompted the need for alternative investments to gold and led to the introduction of the petrodollar in 1972 for the sale of petroleum products. It is important to note that the term “petrodollar” does not refer to a specific currency, but rather to US dollars earned from the sale of crude oil.
The United States faced sanctions from OPEC, the organization of oil-producing countries, for its alleged support of Israel, increasing petroleum prices. To address this issue, US Secretary of State Henry Kissinger and Saudi Prince Fahd bin Abdul Aziz signed the Petrodollar Agreement on June 8, 1974. This agreement was mutually beneficial for both countries at the time. The United States needed to ensure a continuous supply of oil from Saudi Arabia, while Saudi Arabia needed a reliable market for its oil exports. In exchange, the United States provided financial and military assistance to Saudi Arabia. As other Arab nations followed suit and began selling their oil in dollars, the US dollar became synonymous with economic value.
Hence, the dominance achieved by the American dollar propelled them to become a global powerhouse. The strengthening of the US currency facilitated the importation of goods from other nations at significantly reduced prices. Additionally, the influx of capital into US Treasury bonds bolstered the stability of the American financial system.
If Israel played a significant role in the negotiation process, it will also play a crucial role in the finalization of the deal. The prominence of this issue may merely be a historical assignment. This is particularly evident in the withdrawal of Saudi Arabia from the agreement, which coincides with the ongoing Israeli-Palestinian conflict in the Middle East and the Russian-Ukraine war, both of which are causing significant upheaval in Europe.
With the termination of the petrodollar contract, Saudi Arabia now can sell petroleum using currencies such as the Indian Rupee, Yuan, Euro, Ruble, and Yen. This, coupled with political changes, is likely to establish an alternative to the US dollar in international trade. Prominent financial media outlets predict that Saudi Arabia’s decision will weaken the American financial system and the US dollar itself. Conducting petroleum transactions in non-dollar currencies will devalue the dollar, leading to inflation in the US market, higher interest rates, and a weakened bond market. Furthermore, withdrawing from the agreement will also alter the current global political dynamics. Saudi Arabia’s close relationships with the US, China, Russia, and India will pave the way for significant and far-reaching transformations.
