Economy & Business

The Petrodollar Deal Has Now Expired. End Of Dollar Supremacy? 

The recent expiry of the 50 years old Petrodollar deal between the United States and Saudi Arabia ended on 9 June 2024 has raised concerns for the supremacy of US dollar as the global reserve currency.  Saudi Arabia has not yet shown any signs of renewal or extension of the agreement till date.

What is Petrodollar?

Petrodollar refers the use of dollars in crude oil transactions. Petrodollar system was introduced following the agreement signed between the US Government led by President Richard Nixon and the Saudi royal family on 8 June 1974. The deal was simple: in exchange for the guaranteeing security of the Saudi regime and providing military equipment & aid, Saudi decided to trade oil only in dollars and invest the returns in the United States Treasury. Following Saudi Arabia, other major oil producing countries also started to trade mostly in Dollars.

Advantages for US

This deal ensured consistent demand for dollars. No matter, every country needed to buy oil in dollars. This demand for dollars holds up the US governments ‘’ borrowing and spending’’ policies. As long as the world needs oil, it guaranteed the demand for dollars. That meant Federal Reserves could print dollars and issue treasuries than otherwise. This assisted the US to become the undisputed global financial superpower.

Dollar has been the major global currency reserve since the end of the second world war. Almost all countries keep currency reserves in dollars and as of the fourth quarter of 2023, the dollars accounted for 58.41% of total official foreign exchange reserves. Petrodollar system has greatly helped in maintaining the dominance of dollars.

This helped the US to become a global power and  blacklist or impose financial sanctions against other countries like Russia, North Korea and Iran etc. For example, in the wake of the Russian invasion of Ukraine in 2022, unprecedented US sanctions cut Russia off from the dollar, freezing $300 billion in Russian central bank assets and triggering a default on the country’s sovereign debt. There is no doubt that if dollars was not the most used currency the sanctions would not have been this effective.

After effects of sanctions and dollar dominance

These sanctions have led to some countries like Russia and China to use gold and other alternatives as reserves to overcome the US sanctions. BRICS, which is an intergovernmental organization made up of Brazil, Russia, India, China, South Africa, Iran, Egypt, Ethiopia, and the United Arab Emirates, has been trying to develop a currency union, but the group had been unable to make progress on its de-dollarization efforts. But these counties have effectively reduced the usage of dollars by promoting trade in their own currency.

India’s efforts effects on Indian economy.

India uses most of its foreign currency reserves for oil imports. This has contributed massively towards inflation in the Indian economy and weakening of Indian Rupees. But recently India has made several steps in trading oil in Indian Rupees itself with Russia, Iran, UAE etc. This has helped us to hold on inflation to some extent.  India should take initiative to use this opportunity to even decrease the usage of dollars to the least possible for the betterment of the Indian Economy.

Impact on US

If Saudi and other countries start to use another currencies for oil trade that would reduce the dollar dominance and affect the US economy. Economists suggest the impact on the US economy can only be severe if the contribution of dollars to global currency reserves falls below 45% from 58.41% or global usage of dollars reduces from 44.15% to 35%, which is greatly unlikely to happen. But the bargaining power of the US using blacklisting or sanction won’t produce the same effect as before. BRICS countries, mostly Indian, China and Russia would play a significant role toward the future alongside the US.

Leon Jose Vithayathil

Leon Jose Vithayathil is a finance professional currently working and residing in the United Kingdom. He is an MBA graduate in Financial Management. He currently works as a Credit Controller with a reputed company in High Wycombe, which comes under the top three waste management and disposal companies in the UK. He pre-owned a company and was an international merchant of spices from Africa and South-east Asia to India. He had also worked as a Chief Finance Officer for an Italian pharmaceutical company in Africa. Leon has been very vocal about social issues faced by the Indian diaspora.

Leave a Reply

Your email address will not be published. Required fields are marked *