All You Need To Know About Saudi's 'Departure' From Petro-Dollar Deal And Its Implications For US
Saudi Arabia’s several moves in the recent past showed that the Kingdom is making drastic transformation in its financial pattern and manner of international transactions. With the country’s entry into BRICS, which has been pushing the idea of replacing the US dollar in global transactions, Saudi Arabia gained confidence to no longer solely dependent on the petro-dollar deal. The Kingdom last week ended the 40-year-old deal, refusing to renew the agreement, signed between US Secretary of State Henry Kissinger and Prince Fahd Ibn Abdel Aziz of Saudi Arabia in 1974.
So far, the Petro-dollar deal, made on one of the most internationally traded commodities, oil, has been keeping the dollar’s dominance intact. After World War two, the US dollar acquired an ascendancy around the world, due to the country’s highest gold reserves amongst nations.
The US was the major supplier of weapons during the war, and the countries fighting the war had to pay in gold, making its gold reserve the largest in the world. As countries faced scarcity of gold reserves, there came the dominance of the US dollar, with at least 44 nations deciding to depend on a new US dollar transaction, replacing the age-old gold. Thus, the Bretton Woods Agreement made by the 44 allied countries in 1944 made the U.S. dollar an official reserve currency.
Notably, the 1974 petro-dollar agreement further boosted the US dollar’s dominance in multilateral transactions. Petro-dollars refer to the revenues generated from the export of crude oil, the enduring use of the U.S. dollar for payment to nations involved in oil exports elevated the say of the dollar on the international front.
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In the 1970s, the US faced inflation, high unemployment, and soaring living costs due to then-president Richard Nixon’s decision to end the dollar’s gold backing. It was against this backdrop that the US sought a solution, finally reaching a deal with Saudi Arabia, ironing out its pressing problems. The US Secretary of State Henry Kissinger in 1974 engaged with the Kingdom of Saudi Arabia to secure the Petro-dollar deal that made Saudi Arabia exclusively sell oil globally in dollars. This further raised the demand for the US dollar in the world, as oil constitutes one of the most needed and traded commodities around the world.
The deal, however, proved to be effective for the US to maintain dollar dominance and sail through the deficit. The investment of dollar profits by OPEC countries in American bonds further beefed up the US economy, making America the biggest beneficiary of the agreement. The deal, in return assured Saudi Arabia protection from outside attacks. The US foreign policy, involving overt and covert military and intelligence actions then helped to maintain dollar prominence all the way.
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The recent trends involving the BRICs nations takes the world to a new international financial landscape, signaling a declining dollar dependence. Several countries are choosing to move away from dollar use. Saudi Arabia’s latest initiative not to renew the pact is expected to have a detrimental effect to the US, according to experts.
Major Impacts Of Saudi Arabia’s Exit Of Petro-Dollar Deal Singed With US
The Kingdom’s decision ends the dependency on US currency for oil transactions. It is learnt that higher interest rates emanating from broken deals could lead to more expensive mortgages, rents, auto loans, student loans, and credit cards. It would also hurt the US banking system, national deficit, and federal budget, leading to higher taxes. In addition, it is believed that the dollar value will be lowered, making it more expensive to travel and buy goods from other countries.
What Prompts Saudi To Move Away From Petro-Dollar Deal
It is analysed that by ceasing the sole dependence on the UD dollar for oil transactions, Saudi will now have the freedom to trade oil using other countries’ currencies such as China and Russia. The country’s interest in joining BRICs – the economic bloc comprising Brazil, Russia, India, China, South Africa, Iran, Turkiye, Algeria and Egypt also indicated a potential shift in its priority.
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It is not just Saudi Arabia alone that is go away from US dollars. Countries such as India, Pakistan, and UAE have also agreed on a deal with Russia or China to pay for oil or other commodities in local currencies. In addition, Russia’s war in Ukraine, Vladimir Putin’s engagements with Xi Jinping and China’s diplomatic rapprochement between Iran and Saudi Arabia are also believed to be a threat to the global hegemony of the US dollar. Whatever the alternatives – Yuan or a BRICS currency or something else -, it could inflict a toll on the US economy, according to analysts.
