Saudi Arabia Drifts Away from Washington and the Dollar
Earlier this week, those of us who follow news about the US dollar’s global status noticed numerous claims that the US-Saudi petrodollar agreement had “expired” and that the Saudis would now sell oil for many currencies other than dollars. Some versions of the story even claimed the Chinese yuan would replace the dollar.
The reports appear to have originated either in India or in publications that cater to crypto investors. Fervor over the story was large enough that economist Paul Donovan at UBS felt the need to clarify that there have not actually been any big, new developments in Saudi-US currency relations.
It now seems clear that these reports of an alleged formal petrodollar “contract” did indeed get several key facts wrong. First of all, the Saudis’ turn toward embracing currencies other than dollars is not new. Moreover, there is no known formal treaty or contract between the US and Saudi Arabia—least of all one with an expiration date.
One could reasonably argue, however, that these reports of the decline of the petrodollar are only wrong in their particulars. The reports do reflect a real-world trend, however, and that’s likely why the stories about the end of petrodollar may seem plausible to many. The Kingdom of Saudi Araba (KSA) has been increasingly moving further away from the US orbit in recent years, and this is reflected in an increased willingness to settle oil deals in non-dollar currencies. There are also other indications that the Saudis are more and more willing to embrace Washington’s adversaries—such as China and Iran and Russia—in spite of Washington’s objections. While short run changes may seem minor, the current trend in US-Saudi relations points to an overall and significant decline in US global influence.
What Is a Petrodollar?
So, what is this petrodollar “deal” that is under threat? It’s an informal deal—dating from 1974—between the US and Saudi Arabia under which the Saudis agree to sell oil only for dollars. The deal also stipulates that the Saudis will invest their excess dollars in US Treasurys. Why does this deal exist? From the American perspective, the deal helps to prop up the US dollar. It is not a coincidence that the deal dates form the early 1970s in the wake of the 1971 Nixon Shock and the closing of the gold window. Moreover, the deal maintains a ready market for ever-growing amounts of US Treasurys as federal deficit spending continually grows.
When the Americans conceived of the petrodollar arrangement, the KSA was the largest oil-produci
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