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Saudi Arabia and the NON-renewal of the Petrodollar agreement: Impacts on the World Economy and the Value of the Dollar

Written by Noel Budeguer
Published 12/06/2024 às 10:59

The non-renewal of the petrodollar agreement by Saudi Arabia challenges the hegemony of the dollar and reshapes the oil market. Discover the economic and geopolitical impacts of this historic change

June 9, 2024 marks a historic milestone in economic and geopolitical relations between Saudi Arabia and the United States. The Saudi Kingdom decided not renew the petrodollar agreement, an alliance that has been fundamental to the global economy for almost 50 years. This change not only challenges the hegemony of the US dollar, but also has the potential to significantly alter the global economic landscape.

End of an Era: The Petrodollar Deal

The petrodollar agreement, signed in 1974 between then-US Secretary of State Henry Kissinger and Crown Prince Fahd of Saudi Arabia, stipulated that Saudi oil exports would be paid for exclusively in US dollars. This pact consolidated the dollar as the predominant global currency in energy trade and strengthened the United States' economic position in the world.

For decades, this alliance has benefited both countries. For the United States, it meant a constant, global demand for its currency, which helped maintain its value and stability. For Saudi Arabia, it ensured a continuous flow of dollars that could be reinvested in the global economy, in addition to receiving military and economic support from a superpower.

Reasons for the Saudi Decision

Since 2022, Saudi Arabia has begun to show signs of a strategic shift, allowing China, one of its main oil buyers, to pay in yuan instead of dollars. This decision reflected not only a reassessment of the Kingdom's international relations, but also a response to China's growing economic influence and Saudi Arabia's need for economic diversification under Crown Prince Mohammed bin Salman's Vision 2030 plan(Eurasia Review) (KSAexpats.com).

Political tensions between the United States and Saudi Arabia also played a crucial role. United States criticism of human rights management in Saudi Arabia and lack of support in regional conflicts such as the war in Yemen have deteriorated mutual trust (Eurasia Review) (UNCTAD Investment Policy Hub).

Impact on the World Economy and the price of the Dollar

Saudi Arabia's decision not to renew the petrodollar agreement has profound economic implications. By opening up the possibility of trading oil in other currencies such as the yuan, euro, yen and others, Saudi Arabia weakens global demand for US dollars. This could lead to a devaluation of the dollar, affecting its value and the economic stability of the United States.

Dedollarization

Failure to renew the agreement could accelerate an already ongoing process of de-dollarization. Countries such as Russia and China have promoted the use of their own currencies in international trade to reduce dependence on the dollar. The inclusion of Saudi Arabia in this movement could give a significant boost to these efforts and foster the creation of a multipolar financial system【6†source】.

Energy Markets

Trading oil in multiple currencies can lead to greater volatility in energy markets. Fluctuations in exchange rates can influence oil prices, affecting both producers and consumers. Furthermore, countries that depend on Saudi oil may be forced to adjust their monetary reserves and investment strategies to adapt to this new reality.

Geopolitical Relations

The change in Saudi Arabia's oil trade policy could also redefine geopolitical alliances. With greater economic cooperation with China and possibly other BRICS countries (Brazil, Russia, India, China and South Africa), Saudi Arabia may find new strategic partners that provide it with a counterweight to the United States' influence in the region.

Consequences for the United States and the Dollar

For the United States, the non-renewal of the petrodollar agreement represents a significant challenge. The loss of exclusivity in trading oil in dollars could reduce global demand for its currency, affecting its value and ability to finance its external debt. Furthermore, it could lead to a reassessment of its foreign and economic policy strategy.

Dollar Value

A decrease in global demand for dollars could lead to a devaluation of the currency. This would affect American imports, making them more expensive and increasing domestic inflation. At the same time, a weaker currency could benefit American exports, making them more competitive on the international market.

Monetary policy

The United States Federal Reserve could be forced to adjust its monetary policy to counteract the effects of decreased demand for dollars. This could include interest rate increases to attract foreign investment and stabilize the currency, which would have implications for economic growth and employment in the United States (Eurasia Review) (Arab News).

The end of an era and the beginning of a new chapter in the global economy

Saudi Arabia's decision not to renew its petrodollar agreement with the United States marks the end of an era and the beginning of a new chapter in the global economy. This shift has the potential to redefine energy trade, destabilize the value of the dollar and alter geopolitical relationships around the world. As markets and governments adapt to this new reality, the impact of this decision will be felt in every corner of the globe.

In short, Saudi Arabia's non-renewal of the petrodollar agreement not only challenges the hegemony of the US dollar, but also opens the door to greater diversification in the global oil trade, with profound implications for the world economy and international politics. .

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Noel Budeguer

Of Argentine nationality, I am a news writer and specialist in the field. I cover topics such as science, oil, gas, technology, the automotive industry, renewable energy and all trends in the job market.

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