The late 1970s energy crises led to the emergence of the petrodollar, a deal rather than a currency. After the United States had just left the gold standard, it struck a deal with Saudi Arabia, one of the world’s largest petroleum producers: Saudi Arabia would price its oil only in United States Dollars, and any excess revenues would be invested in U.S. Treasury Bonds. The deal had several effects, guaranteeing U.S. oil supply and establishing the U.S. Dollar as the world’s reserve currency.
Now, this agreement has ended.
Recently, the 50-year-old agreement between Saudi Arabia and the U.S. regarding petrodollars was allowed to expire. The U.S. Dollar is used globally as the currency for crude oil transactions. The origins of this arrangement trace back to the 1970s, when the United States and Saudi Arabia signed a deal shortly after the U.S. departure from the gold standard. This agreement would have profound effects on the global economy. Few agreements in the history of international finance have been as beneficial to the U.S. as the petrodollar agreement.
These benefits are no longer in effect. The economic consequences for the U.S. are difficult to predict, but they are unlikely to be positive. While this may affect the price of imported petroleum, making it more expensive due to the weakening dollar, there are domestic resources that can be utilized to mitigate these effects. In the short term, this could even increase demand for American oil. Oil is a globally traded commodity, and without the petrodollar supporting it, a weaker dollar could make American exports appealing on international markets, potentially.
The sale of oil in U.S. Dollars has implications far beyond oil and finance. The agreement mandating oil sales in U.S. Dollars elevated the dollar as the world’s reserve currency (DXY). This has profoundly impacted the U.S. economic system. The demand for dollars for oil purchases has maintained the dollar’s strength and kept imports inexpensive for American consumers. Foreign investment inflows into U.S. Treasury Bonds have also supported low interest rates and a robust bond market.
However, several issues need addressing.
Firstly, the dollar will inevitably weaken, increasing the cost of imports into the United States. What are the top imports of the United States, from small trinkets to large industrial transformers? China. It may be recalled that China is not a friendly country to the United States. Secondly, the loss of the dollar’s global reserve currency status is likely to reduce foreign investment in U.S. Treasury Bonds, primarily used to finance America’s runaway spending. The bond market, interest rates, inflation, and public debt will all be subject to a dramatic, sudden adjustment, which will not benefit American consumers.
The expiration of the petrodollar could weaken the U.S. Dollar and consequently U.S. financial markets. Oil priced in a currency other than the dollar could reduce global demand for the dollar, potentially leading to higher interest rates and inflation in the United States.
The U.S. Dollar has been the world’s reserve currency for most of the post-war period. Which currency could replace the dollar: the ruble or the yen? The Saudi riyal? The renminbi or the Saudi riyal? The United States cannot consider any of these factors. Nor can a world without a global reserve currency last. This situation will not persist. After all, nature despises voids.
The expiration of the petrodollar deal marks a significant shift in global power dynamics. The end of the petrodollar agreement underscores the growing influence of emerging economies and changes in the energy landscape. Investors should be aware that globally, the financial system is entering a new era. The dominance of the U.S. Dollar in the world is no longer assured.
This is likely to lead to a radical change in the global order. The United States has several advantages: it is one of the few developed nations that does not face a major demographic catastrophe. The United States has a strong industrial base, and with its vast expanses of arable land, hunger is not a concern. Alaska boasts significant oil and gas resources.
The petrodollar agreement is over. We do not know the effects of ending the petrodollar agreement on the American and global economies. However, we can foresee that they will be negative, especially for the United States. The next century may differ significantly from the last.
Predicting the future is challenging. However, the end of this 50-year-old agreement is likely to reshape the world, perhaps dramatically. If this agreement is not renewed, the United States will likely face a recession. Without a strengthened U.S. Dollar, a recession or even a prolonged depression could occur.
This has never been more pertinent.
