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The 50-year U.S.-Saudi petrodollar deal expired recently. Global crude oil transactions employ the U.S. dollar, known as the “petrodollar”. After the U.S. left the gold standard in the 1970s, the US and Saudi Arabia made a pact that had far-reaching effects on the world economy. Few global financial accords have benefited the U.S. economy as much as the petrodollar pact.
Good for U.S. Bonds
After the 1973 oil crisis, Saudi Arabia agreed to price its oil exports in U.S. dollars and invest its surplus income in Treasury bonds under the petrodollar agreement. The U.S. protected the kingdom militarily in return. This deal gave the U.S. a dependable oil supply and a captive debt market, while Saudi Arabia received economic and overall security.
Reserve Currency status
Oil denominated in U.S. dollars is significant beyond oil and finance. The deal made the dollar the world’s reserve currency by requiring oil sales in DXY. This has greatly affected the U.S. economy. American consumers pay less for imports because the global need for dollars to buy oil has kept the currency strong. Foreign investing in U.S. Treasury bonds has also kept interest rates low and the bond market strong.
In Bonfire of the Sanities (December 2023), bestselling author and investment manager David Wright argues that the dollar’s strength drives America’s high standard of living. Wright said Americans have “as high of a standard of living as we do because the dollar is strong.” Wright said this strength is due to faith in our economy “and because energy can’t be bought without U.S. dollars.”
Threatens Global Financial Order
The petrodollar’s dominance may face its biggest test yet. The U.S.-Saudi agreement expired June 9, 2024. This expiration might upset the global financial order.
The changing power dynamics of the oil market are key to this evolution. Alternative energy sources like renewables and natural gas have reduced oil dependence. New oil-producing nations like Brazil and Canada have challenged Middle Eastern dominance.
The petrodollar’s expiration might harm the dollar and financial markets. If oil were priced in a currency other than the dollar, worldwide dollar demand could fall. Higher inflation, interest rates, and a worse US bond market may occur.
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