Has the petrodollar agreement come to an end?

On June 9, the 50-year-old petrodollar agreement between the US and Saudi Arabia — one of the keystones of America’s post-war global hegemony — was allowed to expire. Or was it?

Over the past few days, the web has been buzzing with reports that on June 9, the 50-year-old petrodollar agreement between the US and Saudi Arabia — one of the keystones of America’s post-war global hegemony — was allowed to expire. Even the Nasdaq website reported on it. If true, the financial and geopolitical implications would be colossal.

In 1974, on the heels of the 1973 oil crisis, the US and Saudi Arabia struck a secret deal whereby the latter agreed to price its oil in dollars and then recycle the dollars received for its oil sales — the so-called petrodollars — into the US in the form of deposits and purchases of US Treasuries; the US, in exchange, would provide military support and security for the kingdom.

This, combined with the fact that any country that wanted to buy oil had to purchase dollars to do so, elevated the dollar’s status as the world’s reserve currency, which effectively bestowed upon the United States the “exorbitant privilege” of not having to pay for its imports, unlike everyone else, because it could simply help itself to the foreign goods and services it needed by paying foreigners with its own currency, “printed” (issued) at no cost — and this without seeing the dollar depreciate, precisely because the global demand for dollars helped buoy the currency’s value.

It’s not an exaggeration to say that the petrodollar agreement has been one of the pillars of the America’s post-war global empire — it’s what has allowed the US to sustain a regime of perpetual war, on top of exercising financial dominance over much of the world. It therefore goes without saying that the non-renewal of the agreement would have far reaching implications — for the already declining US imperial system, as well as for the global financial order more in general.

But is true? Unfortunately — at least for those of us that view the decline of the US empire as a positive development — it would appear that it isn’t. I haven’t been able to find any official source confirming the story. Moreover, there doesn’t even appear to be any evidence that the petrodollar agreement had a 50-year expiry date.

That said, even if the story is fake, as it would appear, the reality is that the petrodollar agreement has been unravelling for some time. What people claim the alleged non-renewal of the agreement will result in — de-dollarisation and, more in general, a geopolitical shift in global power away from the US and towards the China-led BRICS bloc, in the Middle East and elsewhere — is already underway.

Last year, Saudi Arabia announced that it would join the BRICS alongside the United Arab Emirates (UAE), Iran, Egypt and Ethiopia. Unlike the other countries, it yet has to formalise that decision, though it continue to entertain strong relations with the bloc, as evidenced by the fact that the kingdom sent its foreign minister to the meeting of the BRICS foreign ministers that just took place in Russia.

The fact that one of America’s (former?) staunchest allies in the Persian Gulf is considering to join a China-led (and increasingly politicised) alliance exemplifies the paradigm shift underway — especially if we consider that it would be joined by Iran, one of America’s most notorious arch-enemies. Moreover, Saudi Arabia had already announced two years ago that it was considering pricing its oil in other currencies — first and foremost the Chinese yuan — while the UAE has already sold oil to China using the yuan. Moreover, the Saudis have been reducing their holdings of US Treasuries for years.

However, it should be noted that this is also a consequence of the US buying less and less oil from Saudi Arabia, as a result of it becoming increasingly energy independent. This is not to say that de-dollarisation — which is happening, though at a slower pace than many expected — is not a problem for the US. The latter still runs a massive trade deficit, which relies on the dollar’s reserve currency to be sustained. But that won’t disappear overnight. However, the long-term trend is clear: the quasi-monopolistic role of the dollar in international transactions is bound to steadily decrease, in favour of the dispersion of reserve assets among several major currencies, and other assets, such as commodities such as gold.

The US faces a choice: become a normal country or attempt to slow down this inexorable process by stoking international chaos and violence. Regrettably, it’s clear which path the US elites have chosen to follow for now.

NOTE: A previous version of the article incorrectly claimed that Saudi Arabia had already joined the BRICS.

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Thomas Fazi

Website: thomasfazi.net

Twitter: @battleforeurope 

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