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Dollar dominance at risk if Saudi Arabia ends exclusive deal to use dollar in oil trade
- Saudi Arabia is moving away from the US dollar in oil trading as it looks for alternative markets.
- The end of a long-standing “petrodollar” agreement would undermine the dollar’s dominance, the Atlantic Council wrote.
- The move would be a sign that Saudi Arabia is instead looking to diversify its trade.
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The potential end of a watershed trade deal between the US and Saudi Arabia would be a blow to the dollar’s supremacy in the oil market and offer a symbolic victory for de-dollarization, the Atlantic Council he said.
In a new blog post, the think tank weighed up the prospect that a 1974 agreement obliging Saudi Arabia to exclusively use dollars in the sale of its crude oil could come to an end. For 50 years, the “petrodollar” agreement guaranteed the role of the US dollar as the world’s main financing and trade currency, the think tank said.
As uncertainty rocked the US economy in the 1970s, the petrodollar became a way to keep the dollar stable. In exchange for security guarantees and military supplies, part of the deal with Saudi Arabia called for traded greenbacks to be recycled into US bonds, deepening the dollar’s role as a reserve currency.
But since the agreement’s origins fifty years ago, much has changed, the Atlantic Council said.
American economic dominance is no longer as pronounced, with its share of global GDP falling from 40% to 25% since 1960. Furthermore, US dependence on Saudi oil has decreased considerably, given the historic explosion in US domestic production.
Instead, alternative markets emerged, encouraging oil economies to rethink their business practices.
“China has become Saudi Arabia’s biggest oil customer, accounting for more than 20% of the kingdom’s oil exports. Beijing has established close, trade-oriented relationships across the Middle East, where US influence has waned.” , wrote fellow nonresident Hung Tran.
For this reason, Riyadh has gradually aligned itself with the de-dollarization movement, which seeks to reduce the dollar’s dominance in global finance.
For example, Saudi Arabia is among potential BRICS candidates, an economic bloc that has become one of the main voices against the dollar. It is also linked to China to help establish mBridge, a cross-border payments system that uses central bank digital currencies.
If these payments ecosystems move forward, it will be a real threat to U.S. Treasury liquidity, putting a key pillar of the dollar’s international standing at risk, Tran said.
“In such a world, the dollar would remain prominent but without its outsized influence, complemented by currencies such as the Chinese renminbi, the euro and the Japanese yen in a way that is proportionate to the international footprint of their economies,” he said.
Tran concluded: “In this context, Saudi Arabia’s approach to the petrodollar remains an important harbinger of the financial future to come, given that its creation occurred fifty years earlier.”
Editor’s note: This article has been revised to reflect the fact that Saudi Arabia made no announcement on June 13 related to oil traded in US dollars. There is no official agreement between the United States and Saudi Arabia to sell oil in US dollars.