Many media outlets have reported that Saudi Arabia has ended its longstanding petrodollar agreement with the United States of America. The problem is, evidence indicates there was never a formal agreement to begin with.
Media companies around the world have described the end of a petrodollar agreement between Saudi Arabia and United States as potentially catastrophic.
Petrodollar Agreement
Media outlets have stated the petrodollar agreement is 50 years old and was signed in 1974, and now claim that the Saudi Arabian government have allowed it to expire.
Reports circulated widely on all social-media platforms including X by users claiming the economic agreement between the two nations would cease to exist.
The claim is that the 50-year-old agreement between the U.S. and Saudi Arabia which would require crude-oil exports in U.S. dollars had expired the week before Father Day in June 2024.
Pundits began to contemplate the collapse of the iconic and long standing agreement.
Claiming it would inevitably deal a death punch to the U.S. dollar’s status as the de facto global reserve currency.
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Global Economic Turmoil
Certainly, financial upheaval and global economic turmoil was on the horizon, or is it?
Almost immediately, Google searches for the term “petrodollar” spiked to the highest level on record for the last 20 years.
Fake “Petrodollar” News Story Gains Worldwide Interest
[Interest over Time = Numbers represent search interest relative to the highest point on the chart for the given region and time. A value of 100 is the peak popularity for the term. A value of 50 means that the term is half as popular. A score of 0 means there was not enough data for this term.]However as speculation about an imminent end to the U.S. dollar’s global dominance intensified, several foreign-policy experts emerged.
No Formal Petrodollar Agreement
What these experts pointed out, was a fatal flaw in logic: The petrodollar agreement itself does not exist.
According to Paul Donovan, who is Chief economist at UBS Global Wealth Management, the news story is fake and has become surprisingly widespread, providing lessons around the pitfalls of “groupthink” and “confirmation bias.”
“Clearly, the story that is going around today is fake news. There was an agreement signed in June of 1974, but it had nothing to do with currencies because the Saudis carried on selling in sterling after that”
Paul Donovan, Chief Economist at UBS Global Wealth Management
In an interview with MarketWatch, Donovan confirmed that the agreement in question is actually called “The United States-Saudi Arabian Joint Commission on Economic Cooperation”.
This agreement was formally established on June 8, 1974, by a joint statement issued and signed by Henry Kissinger, the U.S. secretary of state at the time, and Prince Fahd, the second deputy prime minister (and later king and prime minister) of Saudi Arabia, according to a report found on the Government Accountability Office’s website.
The agreement, was initially intended to last five years, although it was repeatedly extended year after year.
The rational for the deal was straightforward: both the U.S. and Saudi Arabia were eager to create more formal trade arrangements that would ensure a win-win for both parties.
Coming on the heels of the 1973 OPEC oil embargo, there was a surge in oil prices leaving Saudi Arabia with a surplus of dollars.
Economic Incentives
The Saudi Kingdom’s leadership was eager to harness this newly created wealth to further industrialize its economy beyond the oil sector.
At the same time, the U.S. wanted to strengthen its then marginal diplomatic relationship with Saudi Arabia, while encouraging the country to recycle its dollar reserves back into the U.S. economy.
Washington also wanted to ensure there would not be a repeat of the 1973 embargo, which sparked a destabilizing wave of inflation, global economic instability, and stock-market crash.
According to Donovan and others who emerged to debunk the conspiracy theories, a formal agreement demanding that Saudi Arabia price its crude oil in dollars never truly existed.
Rather, Saudi Arabia continued accepting other currencies in trade for crude oil and never stopped although many countries preferred to trade in greenbacks.
Perhaps the closest thing to a petrodollar deal was a secret agreement between the U.S. and Saudi Arabia reached in late 1974.
This cooperation agreement promised military aid and equipment in exchange for the Saudi Kingdom investing billions of dollars of its oil-sales proceeds in U.S. Treasuries, according to Donovan.
The existence of this secret agreement wasn’t revealed until 2016, when Bloomberg News filed a Freedom of Information Act request with the National Archives.
Bloomberg’s reporting also led to the Treasury Department breaking out figures on Saudi Treasury ownership for the first time.
In this report it revealed that the Kingdom was among the largest creditors to the U.S. at the time it was published.
Although Bloomberg’s sources reportedly said the official figures likely underestimated the Kingdom’s actual total dollar reserves.
Still, the notion that the petrodollar system largely grew organically from a place of mutual benefit for both countries.
Rather than the nonexistent petrodollar agreement remains a matter of indisputable fact, according to Gregory Brew, an analyst at Eurasia Group.
Of course, this has not stopped conspiracy theories from demising the origins of the petrodollar system from its blossoming as far back as the 1970s.
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“The evidence for any kind of conspiracy is thin to nonexistent, there is a very clear record of both the Americans and the Saudis being concerned in the aftermath of the global oil shock of what Saudi surpluses would do to the global economy. It was a very common-sense solution to a mutual problem”
Gregory Brew, an analyst at Eurasia Group in an interview with Marketwatch
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Saudi’s New Direction
Without a doubt there have been some signs recently that the Saudis are more open to accepting other currencies other than USD as payment for some of their oil sales.
The Wall Street Journal has reported that the Saudis have been in talks with Beijing for years about accepting payment in yuan, for example.
But even if such agreements were reached, Saudi Arabia’s close economic and military ties with the U.S. would remain intact.
As well as the fact that nearly the entire global system for financing, insuring, and transporting oil requires U.S. Dollars.
Which will likely continue to incentivize the Kingdom to continue seeking U.S. Dollars as its preferred and primary form of payment, according to Jeffrey Kleintop, chief global investment strategist at Schwab, who posted about it on X.
Stronger Ties
So for all the new media fake news hype and all the commentators the reality is nothing seems likely to change in the near future in terms of global trade in USD for crude oil.
This is especially true as the U.S. and Saudi Arabia reportedly are on the cusp of signing a landmark military defence treaty, according to the Journal.
Ultimately, the most important question for the American government is if Saudi Arabia will decide to change its reserve currency from the U.S. dollar.
If it does then there may be a reason for concern, but until then the greenback appears to at its strongest level in years with no signs of a weak position due to loss in global trade.
