Saudi Arabia’s recent decision not to extend the petrodollar deal with the United States marks a significant shift in the global economic market. As we are aware, this agreement was established in the 1970s, when the US dollar had dominance in international trade and was used in all the crude oil deals. The end of this deal could definitely have some crucial implications for the global financial system and geopolitical dynamics, especially the threat to the US dollar and its monopoly over other currencies in the world. So in this new blog, we will critically discuss this topic, from its background to its future implications.
Background and Significance
If we talk about the background of this deal, then you have to understand that this petrodollar system was introduced by the United States and Saudi Arabia in a 1974 agreement between the U.S. and Saudi Arabia. According to this deal, Saudi Arabia agrees to make any deal in oil, and all payments will be made in US dollars, which makes the US dollar the world’s reserve currency. For example, if you want to buy oil at a high level, then you have to make payments in US dollars rather than your own country’s currency.
So this means the US dollar has become the most valuable and influential currency in the world, especially in the global financial market. Here, the question is: why has Saudi Arabia made this deal, and what do they want to get from it? Well, they actually want not just economic support but also military support from the US, as the US has advanced military equity and power. So that’s why they had such a deal with the US for decades.
Key Reasons Behind this Recent Shift
Here the question is: why is Saudi Arabia not interested in extending this deal anymore, and what are the reasons for these shifts? Well, Saudi Arabia decided not to extend this deal with the US anymore for many reasons. Some of the key reasons we are going to discuss here.
The most important is geopolitical change. Right now, in 2024, it is difficult to argue that the US is the only country in the world with a single power to control the world. Many other players in the world challenge this perception and show their strength in different ways, and the most prominent country is China.
Secondly, China is already considering doing such trade with their currency, and other countries like Russia, which follow the same route, also do many things together with China to reduce their dependency on dollars, especially after getting sanctions from the US, which we have already seen recently, which led them to bring their currency into the global oil market either to dominate US dollars or replace it.
The third and most important point is that Saudi Arabia knows that the world order is changing over time and that being completely dependent on the US is not in the favor of Saudi Arabia due to the fact that China is getting a stronger position not just in the global market but also as a key player in the global order. Apart from that, China is also one of the leading buyers of oil. So they changed their policy by increasing engagement with China in recent years, which is, of course, a challenging situation for the US as this shift does threaten US interests and its position in the global order.
Implications for the U.S. and Global Markets
The end of this deal between Saudi Arabia and the US will have some implications for the US, e.g., the demand for dollars will be reduced over time. If this happens, it will bring more inflation, which directly affects their economy. If we talk about global markets, then this end of the petrodollar deal will also affect the global market in a negative way, bringing more uncertainty and choices. If there is volatility in the market, then the price of stocks and bonds will change unpredictably, especially the currency. As a result, you will see a rise in cryptocurrencies like Bitcoin, etc.
The last but not least, the end of the petrodollar deal, will affect US monopolies and power in the world, especially their overall policies for the world. while it will help countries like China and Russia, including those in the BRICS, to introduce and bring their own financial systems and reduce the power of the US to put any sanctions on other countries as they did in the past.
What lies ahead?
Of course, it will bring more challenges for the US to keep its influence not only on the global market but also challenge its monopoly over the oil market and position as the most influential country in the world, which alone controls the world and its financial system.
While other key players like China and Russia will position themselves and reduce the US monopoly on the global financial system, they will emerge as new key players in the economic world.
However, it is not as simple and easy as it seems. This will, of course, take years, but it will reshape the world order and bring more players into the global order.
Finally, this will not only bring new opportunities for countries but also uncertainty and choice, not only in economic terms but also in a geopolitical setting that is not in the favor of other less developed or developing countries.
Disclaimer: The insights provided in this blog are purely our own analysis based on research, are for informational purposes only and should not be considered financial advice. We are not responsible for the accuracy of this information, as we do not claim any specific informational source but analyze news on the basis of our research.
