Is this the beginning of petrodollar’s end?

In 1974, Richard Nixon agreed with Saudi King Faisal that in return for denominating the kingdom’s oil sales in dollars, the US would provide weapons and protection. That deal was not officially renewed earlier this month. The effect on the dollar’s dominance could be immense.
US President Richard Nixon (L) and US Secretary of State Henry Kissinger (C) with Saudi King Faisal at the Riasa Palace in Riyadh, July 15, 1974.
US President Richard Nixon (L) and US Secretary of State Henry Kissinger (C) with Saudi King Faisal at the Riasa Palace in Riyadh, July 15, 1974.Credits: X.com

On June 9, there was a rash of reports that Saudi Arabia would not be renewing its 50-year-old petrodollar agreement with the US. Thus ended an extended period when the US dollar pretty much had a free run of one of the most valuable traded items in the world. This is how it all began.

“It was July 1974. … An embargo by OPEC’s Arab nations—payback for US military aid to the Israelis during the Yom Kippur War—quadrupled oil prices. Inflation soared, the stock market crashed, and the US economy was in a tailspin,” wrote Andrea Wong in The New York Times decades later.

Just three years earlier, in August 1971, US President Richard Nixon had unilaterally torpedoed the gold standard. By 1973, free-floating fiat currencies had replaced the Bretton Woods system, to set up which Roosevelt had got 44 Allied countries to install the US dollar as the new ‘good as gold’ standard in 1945. In June 1974, Nixon brought into existence the US-Saudi Arabian Joint Commission on Economic Cooperation, which would denominate oil sales in dollars in exchange for US weapons and protection to the Saudi kingdom.

The week after the agreement, Nixon went on a trip of the Middle East, including Saudi Arabia. In July, the US Treasury secretary took a two-week tour of “economic diplomacy” to the Middle East. The idea, wrote Wong, was to “neutralise crude oil as an economic weapon and find a way to persuade a hostile kingdom to finance America’s widening deficit with its newfound petrodollar wealth”. In July, Saudi Arabia decided to invest its oil dollars in US Treasuries—a fact that was kept confidential until 2016.

This was pure econopolitik. The fourth Arab-Israeli conflict had broken out in October 1973. By December 1973, oil prices shot up 300 percent. The Organization of Arab Petroleum Exporting Countries, a part of OPEC, declared an embargo against the US for overfriendliness with Israel. The effects of this were felt Americawide: in 1974, daylight savings time went into effect and the national speed limit was lowered to 55 mph to conserve fuel.

The US-Saudi understanding snowballed. By 1975, all of OPEC agreed to sell oil in dollars in exchange for weapons and military assistance. The agreement was for five years, but was reiterated down the years. The petrodollar has ruled mightily since, despite the dollar itself suffering 537 percent inflation between 1974 and 2024.

“The international monetary system is facing its most difficult period since the 1930s,” wrote H Johannes Witteveen, IMF managing director, in January 1974. It was in the light of these developments that the US-Saudi agreement came to pass.

The dollar’s perkiness was paralleled by massive payment imbalances, especially in the debts of oil-importing nations. In 1973-77, the foreign debt of 100 developing countries increased 150 percent. The European countries instituted their own stabilising strategy. In 1972, the European Economic Community introduced the hyperconnected ‘European snake’, with countries controlling their currencies from fluctuating more than a percent from an agreed exchange rate. The ‘snake’ presaged the 1979 European Monetary System, and was ranged against the dollar.

The value of the dollar has never not sunk despite attempts by the US, German, Japanese and even OPEC to maintain a holding pattern. In 1979, many investors, including Saudi Arabia, began disholding US dollars as reserves, parking their surplus in alternative reserve currencies like the Deutschemark, the Japanese yen, and the Swiss franc.

Indeed, the very day after the anniversary of the agreement passed without Saudi Arabia renewing it, the dollar’s defenders were out in force trying to argue, first, that there had never been a US-Saudi petrodollar deal; second, that if there had been, it had not been comprehensive; and, third, that the dollar-denying news was a product of ‘crypto speculators’. It hadn’t, of course: the agreement has clearly not been renewed.

Saudi Arabia’s move to unclip its oil revenues from the dollar might have been sudden, but it wasn’t without warning. In March 2022, The Wall Street Journal reported: “Saudi Arabia is in active talks with Beijing to price some of its oil sales to China in yuan, people familiar with the matter said, a move that would dent the US dollar’s dominance of the global petroleum market….” In January 2023, Saudi Arabia indicated that it would explore payment in other currencies. In April 2023, Nigel Green, founder and CEO of the deVere Group, one of the world’s largest financial advisory and asset management companies, said, “Separately, two deals… would see Saudi Arabia’s Aramco supplying two Chinese companies with a combined 690,000 barrels a day of crude oil, bolstering its rank as China’s top provider of the commodity. It has been reported that Saudi Arabia is also in talks with Beijing to settle with the yuan instead of the dollar.” Last year, China and Saudi Arabia signed a $7-billion local currency swap agreement in efforts to boost trade reducing their dollar reliance.

The dollar’s share in the world’s foreign exchange reserves has decreased from more than 70 percent in 2000 to about 55 per cent in the last quarter of 2023, after exchange-rate and interest-rate adjustments.

As of November 2023, the dollar’s share in global payments was 47.08 percent. Its anticipated drop further into this year is expected to be led by the Saudi de-petrodollarisation.

(Views are personal)

(kajalrbasu@gmail.com)

Kajal Basu | Veteran journalist

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