June 9, 2024, marks a pivotal moment in Saudi-USA relations as Saudi Arabia decides not to renew the long-standing petrodollar agreement established 50 years back.
What Was the Agreement?
The petrodollar agreement, formalized after the 1973 oil crisis, stipulated that Saudi Arabia would price its oil exports exclusively in U.S. dollars and invest its surplus oil revenues in U.S. Treasury bonds. In return, the U.S. provided military support and protection to the kingdom. This agreement established two joint commissions: one for economic cooperation and another for Saudi Arabia's military needs. It heralded an era of increasingly close cooperation between the two countries.
Why Wasn't the Agreement Renewed?
Many reasons have been attributed to this decision, but my opinion is 50 years seems to be a long time to maintain any system, and times have changed. Both the economic interests and political aspirations of the USA and Saudi Arabia have evolved, reducing the necessity of continuing the agreement. Over the years, Saudi Arabia has embarked on a path of economic revival and is now experiencing the benefits of engaging with multiple global business centers that align with its current goals. Limiting itself to a specific currency is not in Saudi Arabia’s best interest at present.
What Happens Now?
By choosing not to renew the contract, Saudi Arabia can now sell oil and other goods in multiple currencies, including the Chinese RMB, Euros, Yen, and Yuan, rather than exclusively in U.S. dollars. The potential use of digital currencies like Bitcoin is also on the table.
In a recent move, Saudi Arabia announced its involvement in Project mBridge. This initiative explores a multi-central bank digital currency (CBDC) platform among participating central banks and commercial banks. Built on distributed ledger technology (DLT), it aims to enable instant cross-border payments and foreign exchange transactions.
The global markets may experience some turbulence but are expected to remain within a stable zone. Bonds and investments denominated in dollars might undergo minor fluctuations in the short term. Currency markets could see volatility for a period.
Strengthening Ties with BRICS and China
Saudi Arabia has the opportunity to strengthen its ties with BRICS nations, notably China, its largest trading partner. As the global order evolves, economic and power centers are naturally shifting, prompting Saudi Arabia to recognize the need for adaptation. While signaling a potential shift away from U.S. dollar dominance, Saudi Arabia also unlocks opportunities for diversified global economic engagement.
Will the US Dollar Collapse?
The US dollar won’t collapse just yet, but it could face increased strain and potential devaluation in the near future. Much will depend on US policies, the November election results, and global political alignments. The decoupling of the dollar from gold has already raised concerns about its value, but its status as a reserve currency and US dominance have helped maintain its image. Moving forward, we may witness an accelerated global shift away from the US dollar.
Gulf countries have been instrumental in fortifying the US dollar through currency pegging, substantial petrodollar investments in the USA, and extensive oil dealings with American corporations. Their contributions have significantly bolstered the strength of the US economy. However, despite this support, the USA has not always reciprocated, sometimes overlooking the political needs of Gulf Cooperation Council (GCC) nations and inadvertently fostering security challenges. The collective response of Gulf countries regarding the dollar and any policy shifts will swiftly and directly influence Dollar’s valuation.
However I believe both Saudi Arabia and the USA still have many shared economic interests and a responsible role to play on the global stage. A sudden devaluation of the dollar is in no one’s interest, especially given the huge reserves many countries hold in dollars.
The World is Changing
The dynamics of global economics and power are shifting. I'll be watching closely as these next few months unfold. I strongly believe our institutions are stronger than ever, with closer collaboration between countries and economies. A stable world economic order is in everyone's interest and will remain a priority for every nation.
This is my perspective; what's yours?