Saudi Arabia Ends 80-Year Petrodollar Deal with the U.S., Signals Major Shift in Global Trade

Last updated on July 26th, 2024 at 03:23 am

Key Points:

• Saudi Arabia chooses not to renew its 80-year petrodollar agreement with the United States, which expired on June 9.
• The original deal, signed in 1974, had bolstered U.S. economic influence globally by ensuring Saudi oil was traded in U.S. dollars.
• Saudi Arabia can now sell oil in various currencies like RMB, Euros, Yen, and Yuan, and is considering digital currencies such as Bitcoin.
• This move signifies a departure from the petrodollar system established after the U.S. abandoned the gold standard in 1972.
• Saudi Arabia is participating in Project mBridge, a digital currency platform for cross-border payments involving multiple central banks.
• The global use of currencies other than the U.S. dollar in international trade is expected to increase.

In a monumental shift in global economic dynamics, Saudi Arabia has decided not to renew its 80-year petrodollar deal with the United States. This agreement, which expired on Sunday, June 9, had been a cornerstone of U.S. global economic influence since it was first signed on June 8, 1974.

The original petrodollar agreement was established to create joint commissions for economic cooperation and address Saudi Arabia’s military needs. At the time, American officials hoped this deal would encourage Saudi Arabia to increase oil production and strengthen economic ties with Arab countries. The arrangement ensured that Saudi oil was traded exclusively in U.S. dollars, reinforcing the dollar’s dominance in global markets.

By opting not to extend this historic contract, Saudi Arabia has opened the door to selling oil and other goods using a variety of currencies. These include the Chinese RMB, Euros, Yen, and Yuan. There is also consideration of using digital currencies like Bitcoin for transactions. This decision marks a significant move away from the petrodollar system that was solidified when the U.S. detached its currency from the gold standard in 1972.

The shift is expected to accelerate the global trend of using currencies other than the U.S. dollar in international trade. This could have far-reaching implications for global financial markets and the U.S. economy, which has long benefited from the dollar’s central role in global oil transactions.

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Moreover, Saudi Arabia has joined Project mBridge, a collaborative initiative exploring a digital currency platform shared among central banks and commercial banks. This project, which began in 2021, aims to facilitate instant cross-border payments and foreign-exchange transactions using distributed ledger technology. Project mBridge has reached the Minimum Viable Product (MVP) stage, and private-sector firms are now being invited to propose innovations and use cases to further develop the platform.

The involvement in Project mBridge highlights Saudi Arabia’s commitment to embracing digital currency and advanced financial technology. This participation is poised to enhance the efficiency of cross-border transactions and reduce reliance on traditional banking systems.

The decision by Saudi Arabia to end the petrodollar agreement is a significant development in the ongoing evolution of global economic structures. While the full implications of this move on international trade and finance are yet to be fully realized, it undeniably marks the beginning of a major shift. Countries worldwide may follow suit, exploring alternatives to the U.S. dollar for international transactions and thereby diminishing the dollar’s hegemony in global markets.

In summary, Saudi Arabia’s decision to not renew the petrodollar deal with the United States signals a profound change in the landscape of global trade. As the country begins to trade oil in multiple currencies and explore digital currency platforms like Project mBridge, the future of international economic relations looks poised for significant transformation. This pivotal move could reshape the mechanisms of global finance, ushering in a new era where diverse currencies and advanced digital payment systems play a central role.