Several reports last week claimed that the petrodollar died quietly. The petrodollar represents the U.S. and Saudi Arabia’s partnership and the dollar’s importance in crude oil transactions. Back in 1973, Saudi Arabia chose to carry out all oil transactions in dollars. This occurred during the oil crisis and the government even agreed to invest its surplus cash in the U.S. Treasury bonds in exchange for U.S. military assistance.
The agreement helped the dollar become the world reserve currency. Given Saudi Arabia’s dominance in global oil trade, all related transactions were priced in dollars. But, this 50-year-old deal ended on June 9. Renewal seems to be out of the picture allowing Saudi to sell oil in different currencies.
Rumors that the Chinese yuan will replace the petrodollar made headlines. In addition to this fiat, many proposed the usage of cryptocurrency, notably Ripple. However, all of this was just talk and the truth behind it was rather hazy.
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Did the ‘Petrodollar Agreement’ Never Exist?
As soon as reports about the demise of the petrodollar surfaced, several experts from Wall Street dismissed these claims. While some suggested that such an agreement never existed, others denied the chances of Saudi exploring other assets. Gregory Brew, an analyst at Eurasia Group said,
“The evidence for any kind of conspiracy is thin to nonexistent. There is a very clear record of both the Americans and the Saudis being concerned in the aftermath of the global oil shock of what Saudi surpluses would do to the global economy. It was a very common-sense solution to a mutual problem”
The Chief Economist at UBS Global, Paul Donovan released a blog post exposing the fake story scenario. He believes that there was indeed an agreement signed back in June 1974. However, it had no connection to currencies because the Saudis went on to sell in sterling following the deal.
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While de-dollarization is underway and Saudi exploring other currencies, the U.S. dollar seems to be strengthening. The U.S. Dollar Index was over 10.5.50 after a few solid days last week. Donovan also suggested,
“Ultimately, the more important question is does Saudi Arabia change the currency in which it holds its reserves, which at the moment is majority dollar.”