In the last few weeks, a flurry of reports announced that Saudi Arabia had quietly let its 50-year petrodollar agreement with the United States expire without renewal, causing rumours to spread about the possibility of an official end to the petrodollar system and, with it, the wider US dollar hegemony. Other media reports suggested this was just “fake news”, that nothing has actually changed. In this column we will try to make sense of this story, which we explore in much greater detail in a forthcoming article.
The context here is the end of the USD convertibility into gold decided by Nixon in 1971, which led major currencies to begin to free float by 1973, and the first oil shock, with its 4-fold increase in the price of oil and OPEC oil embargo. In 1974, two separate agreements were signed as a result of this. One, signed on June 8th, 1974, established the “U.S.-Saudi Arabian Joint Commission on Economic Cooperation” to “fosters closer political ties between the two countries through economic cooperation; assists Saudi industrialization and development while recycling petrodollars.” The second agreement was secretly signed later in 1974, in which the U.S. promised military aid and equipment in exchange for the Kingdom investing billions of dollars of its oil-sale proceeds in U.S. Treasurys.
While most press reports are suggesting that it was the first of these two agreements that was not renewed earlier this June, in reality it is the second, which remained secret for decades, that gets closer to the “military security in exchange for petrodollar recycling into U.S. Treasuries” deal that people refer to.
Whether a formal agreement as opposed to an established practice existed, the petrodollar system has developed over the decades and has helped in establishing the USD as the global reserve currency. From this perspective, regardless of whether or not an agreement was formally renewed, in practice nothing substantial will change until an equally large and liquid market and widespread currency replaces those of the U.S., and this does not seem to be on the horizon. Some oil transactions will occur in local currencies, in Chinese yuan, etc. but this will not undermine the role of the USD as the global reserve currency.
However, there is an element that makes this story even more intriguing, which cannot be easily dismissed. Just a couple of days prior to the supposed expiry of the “petrodollar deal,” on 6 June 2024, the Saudi Central Bank confirmed it was joining the mBridge multi-CBDC (Central Bank Digital Currency) project as a full participant, as the initiative moved from the production phase to the ‘minimum viable product’ phase. Saudi Arabia’s joining the China’s dominated “new rails” for cross-border payments may be interpreted as a signal that Saudi Arabia is ready to shift away from the U.S.-dominated financial architecture. The potential for Saudi Arabia to embrace CBDCs, and, by extension, the financial architecture championed by China and the BRICS, would pose an unprecedented challenge to the existing U.S.-led global financial order. In effect, it would mark a watershed moment for the US dollar’s unchallenged supremacy as the global reserve currency.
