US-Saudi petrodollar deal ends after 80 years: What are petrodollars?

The US-Saudi Arabia petrodollar deal has ended after 80 years. Read on to learn about the history of the deal and what petrodollars are.
US-Saudi petrodollar deal ends after 80 years: What are petrodollars?
Anjali Raj / Jaano Junction

The US-Saudi Arabia petrodollar deal, a pivotal arrangement in global finance, has ended after 80 years.

This landmark deal, initiated on June 8, 1974, facilitated the exchange of US dollars for crude oil exports, bolstering the dollar's dominance.

It expired on June 9.

Petrodollars are not a currency but US dollars exchanged for crude oil exports.

The term "petrodollars" refers to the US dollars earned by oil-exporting countries through the sale of oil.

The concept emerged in the early 1970s and has played a significant role in global economics and geopolitics.

History behind petrodollars

Initially, the Bretton Woods Agreement of 1944 established the US dollar as the world’s primary reserve currency, pegged to gold. This facilitated international trade and economic stability post-World War II.

However, in 1971, US President Richard Nixon ended the dollar's convertibility to gold, leading to floating exchange rates and increased currency volatility.

In the following year, the Organization of Petroleum Exporting Countries (OPEC) imposed an oil embargo in response to US support for Israel during the Yom Kippur War, causing oil prices to skyrocket.

The US struck a deal with Saudi Arabia and other OPEC countries to stabilise the situation, where oil would be traded exclusively in US dollars.

In return, the US provided military protection and economic support. This agreement marked the birth of the petrodollar system.

US-Saudi petrodollar deal

In 1974, amid an oil crisis and skyrocketing prices due to OPEC sanctions, the US and Saudi Arabia struck a crucial deal.

The US agreed to buy oil from Saudi Arabia and provide military aid and equipment, while the Saudis would invest their petrodollar revenue back into the US economy.

This arrangement ensured a steady flow of oil to the US and financial stability for Saudi Arabia, benefiting both nations.

What happens now?

With the deal's expiration, Saudi Arabia is now free to sell oil for currencies like yuan, euros, rubles, and yen, and is considering digital currencies like Bitcoin.

This shift may accelerate the trend of using alternative currencies for international trade, potentially weakening the US dollar's global dominance.

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US-Saudi petrodollar deal ends after 80 years: What are petrodollars?

A decline in global demand for the dollar could lead to higher inflation, interest rates, and a weaker bond market in the US, reflecting a significant change in global financial dynamics.

Source: India Today

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