In June this year, Saudi Arabia stopped all oil sales priced in US dollars, marking the expiration and end of the 50-year oil dollar agreement signed on June 6, 1974. Saudi Arabia will now sell its oil in various currencies including the euro, Japanese yen, Chinese yuan, etc., rather than solely in US dollars. The end of the oil dollar system has profound historical and practical significance. Will the era of the petrodollar come to an end? Why did Saudi Arabia abandon the half-century oil-security agreement with the US? Will other currencies replace the dollar? Can the BRICS system challenge the petrodollar? Will the status of the US dollar as a reserve currency be shaken? These are all topics that people need to pay attention to.
The term “petrodollar” refers to the role of the US dollar as the currency for oil transactions in the world market. In the 1970s, shortly after the gold standard was abandoned, the United States reached an agreement with Saudi Arabia. The petrodollar agreement stipulated that Saudi Arabia would price its oil exports only in US dollars and invest its surplus oil income in US Treasury bonds. In return, the US provided military support and protection to Saudi Arabia. This mutually beneficial agreement ensured stable oil sources for the US and a debt market, while Saudi Arabia secured its economy and overall national security.
The significance of pricing oil solely in US dollars goes beyond oil and finance. By mandating oil sales in dollars, the agreement elevated the US dollar’s status as the world’s reserve currency, boosting the US economy in return. The global demand for dollars to purchase oil has helped maintain the strength of the dollar, making imports relative cheaper for US consumers. Foreign capital flowing into the US to buy Treasury bonds has supported low interest rates and a robust bond market.
Financial expert Andrei Jikh warned that the announcement by Saudi Arabian Prince to not renew the agreement signifies a significant change in the global financial landscape. The reason for Saudi Arabia’s decision not to renew the agreement is part of a “larger story,” the full impact of which on us and future generations is not yet fully understood.
Katja Hamilton, the editor of Bizcommunity, believes that the expiration of the agreement allows Saudi Arabia to sell oil and other commodities in various currencies such as the euro, yen, yuan, and potentially even cryptocurrencies like Bitcoin, not just in dollars. This latest development marks a significant shift from the oil dollar system established in 1972 when the US decoupled its currency from gold, potentially hastening the global shift away from the dollar.
Yahoo Finance’s warning article stated that the transformation of the dollar is happening in real time, and investors must be prepared. Nigel Green, CEO and founder of deVere Group, one of the world’s largest independent financial advisory firms and asset management companies, warned that with Russia and Saudi Arabia showing interest in the yuan for oil trading, the dollar’s dominance is waning, and investors may need to start adjusting their long-term investment strategies. Investment manager and writer David Wright even suggested in his book “Bonfire of the Sanities” that the dollar’s strength is a key factor behind America’s high living standards. Paul Hoffman, a financial journalist at TipRanks, believes that with the expiration of the 50-year agreement with Saudi Arabia, the dollar’s strength may have already “lost one of its most powerful propellers.”
As one of the most crucial and widely traded commodities in the world, oil has traditionally been priced and traded in dollars. The petrodollar has helped the dollar dominate the global financial market. However, if oil trading shifts away from the dollar, it will reduce the demand for dollars, potentially leading to depreciation and a series of chain reactions globally, including rising inflation and instability in the global financial market. The geopolitical consequences of no longer using the dollar in oil trade would also be significant. If the renminbi gains broader usage in oil trading, it would strengthen China’s political influence to a certain extent and challenge US dominance in global affairs.
The agreement between the US and Saudi Arabia expired on June 9, 2024. The US government maintained a close relationship with the Saudi regime during President Trump’s first term. However, during the Biden administration, cracks appeared in the US-Saudi relations, and meanwhile, China’s influence also increased, potentially leading to the non-renewal of the agreement.
The international oil market has seen many dynamic changes in recent years. During President Trump’s term, the US greatly increased oil production, especially shale oil, reaching a stage of energy self-sufficiency and net exports, significantly reducing dependence on Middle Eastern oil. The rise of alternative energy sources like renewable energy and natural gas has also reduced global reliance on oil. The emergence of new oil-producing countries like Brazil and Canada has also threatened the dominance of oil from the Middle East.
In fact, in 2023, Saudi Arabia intended to trigger Washington’s attention by advocating for “de-dollarization,” but the Biden administration seemed to overlook it. When Saudi Arabian Finance Minister Mohammed al-Jadan announced in January 2023 that Saudi Arabia was willing to use “currencies other than the dollar” in oil contracts, he may not have expected such widespread media attention. Since his comments at the World Economic Forum, Saudi Arabia, along with China, Russia, Iran, and Brazil, joined the global chorus of “de-dollarization.”
China, Russia, Iran, and Brazil, despite tense political relations with the US, openly advocate reducing the dollar’s role as the primary global trade currency. However, Saudi Arabia’s situation is different due to its close and unique relationship with the US, using the dollar as the standard currency for oil sales in exchange for US military and security support, with some oil revenues also invested in US government bonds. Therefore, al-Jadan’s remarks were indeed surprising and to some extent reflected errors in US Middle East policy.
In 2018, journalist Jamal Khashoggi was assassinated by Saudi agents in Istanbul, with severe criticism from the US political circles towards the de facto leader of the country, Crown Prince Mohammed bin Salman (MBS), for ordering the operation. Although President Trump attempted to temper these reactions at the time, blunt criticisms from the US political establishment shocked Saudi Arabia. Prior to that, Saudi Arabia and the UAE implemented an economic blockade against Qatar, which also faced harsh criticism from the US. The US’s “unfriendly” policies pushed Saudi Arabia towards cooperation with China and Russia.
Under Chinese mediation, Saudi Arabia and Iran engaged in normalization talks and subsequently restored diplomatic relations, reopening embassies, with Iran’s foreign minister visiting Saudi Arabia. China’s involvement in mediating reflects the deepening bilateral relations between China and Saudi Arabia. Especially after Russia’s invasion of Ukraine in 2022, Saudi Arabia also cooperated closely with Russia within OPEC+, supporting oil prices and ignoring US objections. The Biden administration attempted to increase diplomatic contacts with Riyadh and expressed willingness to take Saudi Arabia more seriously, but it seems to be too late and with little effect. The four areas where the US’s stance on arms sales to Saudi Arabia, effective deterrence against Iran, promoting a resolution for Palestine, and criticism of Saudi Arabia’s human rights violations have left Saudi Arabia feeling frustrated and helpless. Therefore, in the current international security situation and structural changes in oil production, combined with the US’s “unfriendly” stance, Saudi Arabia’s abandonment of the half-century oil-security agreement is not difficult to understand.
If the dollar’s status weakens, will other currencies replace the dollar? Can the BRICS system counter the petrodollar? This is a key question. If Saudi Arabia becomes more focused on the BRICS nations and stops using the petrodollar, what will be the impact on the US and the dollar? One impact is that the global demand for the dollar will decrease, potentially leading to depreciation and domestic inflation in the US. The status of the dollar as the world’s main reserve currency may also be threatened, resulting in a shift of reserves to other currencies. If the Federal Reserve raises interest rates to defend the dollar, it may also slow down US economic growth.
Russian President Putin stated at the St. Petersburg International Economic Forum this year that the BRICS countries are establishing their payment infrastructure independent of the US. Currently, the proportion of Russian exports paid with “toxic” currencies from unfriendly countries has halved, with the abandonment of the dollar and euro already underway, and this process may be inevitable. This trend’s impact on the US and the EU is thought to be as powerful as a nuclear strike by some.
However, no matter how the BRICS system integrates, cooperates, or tries to become a global pole, internal differences and even conflicts within it are inevitable. Between China and Russia, although there is currently so-called “no ceiling for cooperation,” Russia has always maintained a high degree of suspicion and concern towards China, especially regarding China’s potential territorial claims in the Russian Far East once China economically strengthens. Between China and India, differences in systems and territorial disputes mean India will never truly trust China, nor will it hand over its economic and financial lifelines to China. The BRICS countries’ joint currency, whether a BRICS coin or digital currency, cannot truly reach a consensus among the founding four (or five) countries and therefore cannot truly be implemented to replace the dollar as the world’s oil currency. A united currency system among the BRICS nations may only be possible with gold as the foundation, but it is unlikely to receive approval from all governments due to domestic political considerations.
The ability of the dollar to remain as the oil currency will undoubtedly be somewhat weakened by the expiration of the US-Saudi agreement. However, despite this weakening, countries including Saudi Arabia will still use the dollar as the primary currency for oil pricing, even if not the sole pricing currency. If other currencies like the renminbi are used for oil pricing, China may still have to continue referencing and comparing against the dollar, indirectly continuing to use the “oil dollar currency.” This is due to historical and customary reasons, the convenience of the widespread acceptance of the dollar, the dollar’s ability for free and flexible exchange, and various other factors related to US power, the size of the US energy market, and its energy export capabilities.
The continued status of the dollar as the world’s reserve currency, in the author’s view, depends on at least three factors: the credibility of the US government; US power including its political, economic, and military strength; and thirdly, US technology and productivity, whether the US can continue producing products that other countries need. Many Chinese vocal critics may predict the dollar’s demise, but in the coming years, they are unlikely to see the collapse of the dollar. Establishing core technologies for human advanced productivity development in the next decade, laying the foundation for the latest technologies in defense technology over the next ten years, from robotics, nuclear fusion, space exploration, quantum computing, advanced semiconductors, to AI software and hardware, almost all are exclusively controlled by the US.
The credibility of the US government, in terms of its debt repayment ability and solvency, has faced challenges due to surging national debt, budget deficits, and policies that strain government resources at times, almost to the brink of “bankruptcy” where it cannot pay interests. Yet those familiar with US politics are not worried, as this is mainly political wrangling over budget issues, which may lead to temporary government shutdowns for days or weeks, but the US defaulting on its debt is impossible.
However, many knowledgeable individuals believe the US government’s debt issues now require thorough resolution. Congressman Thomas Massie from Kentucky always wears a pin displaying the number of the US national debt in the congressional chamber. The figure, reaching 14 digits, flips at an astonishing speed, reportedly increasing by $100,000 every second! It is truly shocking. The US can maintain such debt levels because of the dollar’s status as an international reserve currency, enjoying almost the financial status as gold. But if the dollar continues to lose its “oil dollar” superior position, as the US’s global reserve currency status continues to weaken, and if the US’s position as a “world hegemon” is further coveted and undermined by the countries of the evil axis, if the US continues to self-harm in politics and fails to repair quickly, if US society continues to deviate from godly teachings and positive beliefs, if the US is no longer a divinely blessed and protected nation, it may eventually lose the historical status of the dollar, which is not entirely an absurd concept.
(Dr. Xie Tian is a professor of marketing at the Moore School of Business at the University of South Carolina, also the John Orb Brown Distinguished Professor)