Saudi Arabia is exploring new markets and considering stepping away from the longstanding practice of trading oil exclusively in U.S. dollars. This significant shift could undermine the dollar’s premier status in the global oil market, according to insights from the Atlantic Council.
The stability of the U.S. dollar as the primary currency for international trade and finance could be jeopardized if the historical agreement with Saudi Arabia, established in 1974, comes to an end. For half a century, this ‘petrodollar’ arrangement has reinforced the dollar’s dominance as the global reserve currency.
Dating back to the 1970s, the petrodollar system was created to maintain dollar stability amid economic uncertainties. In return for security and military support, Saudi Arabia agreed to invest the dollars earned from oil sales into U.S. bonds, which further cemented the dollar’s position as a reserve currency.
However, the world’s economic landscape has evolved since the pact was formed. The United States’ proportion of the global GDP has decreased, and its reliance on Saudi oil has diminished due to surges in domestic oil production.
Consequently, other markets have emerged, providing crude oil-producing countries with reasons to reevaluate their trade arrangements.
“With China becoming Saudi Arabia’s most significant oil client, representing over 20% of the kingdom’s oil exports, and fostering strong trade ties throughout the Middle East where U.S. influence has declined, the region is leaning towards the de-dollarization trend,” noted Hung Tran, a nonresident fellow.
Saudi Arabia’s interest in joining the BRICS group and collaborating with China to develop mBridge, a digital currency-based payment system, exemplifies its gradual shift away from dollar-centric trade.
Should such alternative payment systems gain traction, they could threaten the liquidity of U.S. Treasuries, potentially diminishing a crucial aspect of the dollar’s global hegemony.
“In a scenario where multiple currencies, including the Chinese renminbi, the euro, and the yen, play a more significant role proportional to their economies, the dollar would still be prominent but not as dominant,” Tran explained.
The stance Saudi Arabia takes on the future of the petrodollar is a critical indicator of what the financial landscape may look like, mirroring the pivotal role its inception played fifty years ago.
This article has been updated to clarify that there has been no official statement from Saudi Arabia regarding changes to oil trading practices in U.S. dollars, and there is no formal agreement between the United States and Saudi Arabia mandating oil sales in U.S. dollars.