By Ryan McMaken
June 17, 2024
Earlier this week, those of us who follow news about the US dollar's global status noticed numerous claims that the US-Saudi petrodollar agreement had "expired" and that the Saudis would now sell oil for many currencies other than dollars. Some versions of the story even claimed the Chinese yuan would replace the dollar.
The reports appear to have originated either in India or in publications that cater to crypto investors. Fervor over the story was large enough that economist Paul Donovan at UBS felt the need to clarify that there have not actually been any big, new developments in Saudi-US currency relations.
It now seems clear that these reports of an alleged formal petrodollar "contract" did indeed get several key facts wrong. First of all, the Saudis' turn toward embracing currencies other than dollars is not new. Moreover, there is no known formal treaty or contract between the US and Saudi Arabia-least of all one with an expiration date.
One could reasonably argue, however, that these reports of the decline of the petrodollar are only wrong in their particulars. The reports do reflect a real-world trend, however, and that's likely why the stories about the end of petrodollar may seem plausible to many. The Kingdom of Saudi Araba (KSA) has been increasingly moving further away from the US orbit in recent years, and this is reflected in an increased willingness to settle oil deals in non-dollar currencies. There are also other indications that the Saudis are more and more willing to embrace Washington's adversaries-such as China and Iran and Russia-in spite of Washington's objections. While short run changes may seem minor, the current trend in US-Saudi relations points to an overall and significant decline in US global influence.
What Is a Petrodollar?
So, what is this petrodollar "deal" that is under threat? It's an informal deal-dating from 1974-between the US and Saudi Arabia under which the Saudis agree to sell oil only for dollars. The deal also stipulates that the Saudis will invest their excess dollars in US Treasurys. Why does this deal exist? From the American perspective, the deal helps to prop up the US dollar. It is not a coincidence that the deal dates form the early 1970s in the wake of the 1971 Nixon Shock and the closing of the gold window. Moreover, the deal maintains a ready market for ever-growing amounts of US Treasurys as federal deficit spending continually grows.
When the Americans conceived of the petrodollar arrangement, the KSA was the largest oil-producing country and a dollars-only trade ensured continued prestige for the dollar. For the Saudis, this close relationship brings certain implied security guarantees from Washington. That is, the Saudi regime knows that so long as it remains an important component of dollar policy, the US will intervene militarily, if necessary, to ensure the continued existence of the Saudi state.
New Threats to the Petrodollar System
Over time, however, geopolitical realities evolve and Saudi willingness to engage in non-dollar oil trades finally became a publicly-stated policy of the KSA regime in January 2023. As we reported here at mises.org last year, the Saudi finance minister stated that "There are no issues with discussing how we settle our trade arrangements, whether it is in the US dollar, whether it is the euro, whether it is the Saudi riyal." At the time, this was indeed a new development, and it was the end of a multi-year period during which there were persistent rumors that the Saudis would move away from the dollar. In 2019, for example, Arab News reported that Riyadh "has rejected the suggestion that it is considering selling oil in currencies other than the traditional US dollar." By 2023, things had apparently changed.
Further changes in Saudi policy continued throughout the year. In mid-2023 the Saudis began to import record levels of fuel oil from Russia, further solidifying trade relations between the two countries. Given how Washington has attempted to cut Russia out of the dollar economy, growing trade between the Russians and the Saudis further drives a need for trade in currencies other than dollars. Then, in November of 2023, The KSA and Beijing signed a currency swap agreement designed to "expand the use of local currencies"-i..e, non-dollar currencies.
Breaking Free of the US Axis
Taken by themselves, these developments might seem like no big deal. After all, the Saudi riyal currency is still pegged to the dollar-for now. Taken in the larger context, however, these recent developments illustrate how the Saudis are moving away from the established monetary and geopolitical order that the US has imposed on nearly the entire world since the end of the Cold War.
In March of 2023, the Saudis participated in a China-brokered deal to re-establish diplomatic relations with Iran. The KSA had long been at odds with the Iranian regime as the two states vied for dominance in the Persian Gulf region. Naturally, Washington has encouraged the Saudis to help the US isolate Iran. Although the US publicly praised the China-brokered deal when it became public, the deal is clearly a blow to US influence in the region. Moreover, if there is any doubt that Washington privately disapproves, we need look no further than the fact the Israeli regime opposed the deal.
Six months later, a September 2023 report from the foreign policy think-tank Stimson concluded that Saudi movements away from the dollar were not mere bluffs from Riyadh. They were, rather, part of a larger diplomatic effort by the Saudis to gain more flexibility in dealing with major global powers like the Chinese and the Russians. Or, as the authors put it, the "Saudis are demonstrating that they have other options in the new multipolar world order."
From the Saudi perspective, the US has provoked Riyadh's disenchantment with its American "partner." US criticism of the Saudi regime over the Jamal Khashoggi murder and the Saudi blockade of Qatar have not been forgotten in Riyadh. Moreover, some members of the US Congress continue to publicly raise uncomfortable questions about the Saudi regime's connections to the 9/11 attacks. The fact that the Washington foreign-policy establishment mostly looks the other way on frequent human rights abuses in Saudi Arabia-while selling immense amounts of arms to the Saudi regime-is not enough to keep the Saudi regime complacent.
Other recent developments suggest this trend isn't going away. For example, after receiving an invitation to the G-7 summit for the first time ever, the Saudi regime declined the invitation with Crown Prince Mohammad bin Salman claiming that he had to personally oversee Hajj pilgrimage activities in Mecca. Days later, the Crown Prince was nonetheless sure to send his foreign minister to Nizhny Novgorod in Russia for this week's BRICS summit.
High-level personnel in Riyadh can apparently make time for BRICS-which Saudi Arabia has been invited to join, and which has become a de facto anti-US bloc-but not for the G-7.
The cooling relationship between Riyadh and Washington does not prove there will be an immediate and major change to the dollar economy or to the US's continued dominance in the Middle East. The trend is nonetheless continued evidence of an ongoing relative decline in US control over global currency markets and the geopolitical order.
Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.