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END OF US-SAUDI PETRODOLLAR PACT: IMPACTS AND IMPLICATIONS



  Jun 19, 2024

END OF US-SAUDI PETRODOLLAR PACT: IMPACTS AND IMPLICATIONS



The 50-year-old petrodollar agreement between the US and Saudi Arabia has expired, marking a significant change in global financial dynamics. This pact, established in the 1970s, has had far-reaching consequences for the global economy, particularly benefiting the US. Here’s an overview of what petrodollars are and the potential implications of this agreement’s end.

Understanding Petrodollars

Petrodollars are US dollars earned by oil-exporting countries through the sale of crude oil. This term emerged in the early 1970s when the US and Saudi Arabia struck a deal to stabilize the oil market after the US went off the gold standard.

History and Benefits of the Petrodollar Agreement

1. Bretton Woods Agreement (1944): Established the US dollar as the world’s primary reserve currency, pegged to gold, facilitating international trade and economic stability post-World War II.

2. End of Gold Convertibility (1971): US President Richard Nixon ended the dollar’s convertibility to gold, leading to floating exchange rates and increased currency volatility.

3. Formation of the Agreement (1973): In response to the 1973 oil crisis and skyrocketing prices due to OPEC sanctions, the US and Saudi Arabia agreed that oil exports would be priced exclusively in US dollars. In return, the US provided military support and protection to Saudi Arabia.

4. Economic Impact: This arrangement benefited both nations. The US secured a stable source of oil and a captive market for its debt, while Saudi Arabia ensured its economic and overall security. The surplus oil revenues were invested in US Treasury bonds, supporting a robust bond market and low interest rates.

5. Global Reserve Currency: By mandating that oil be sold in US dollars, the agreement elevated the dollar’s status as the world’s reserve currency. This increased global demand for dollars, kept the currency strong, and made imports relatively cheap for American consumers.

Potential Disruptions and Implications

Shifting Power Dynamics

The expiration of the petrodollar agreement signals a shift in global power dynamics, influenced by several factors:

1. Rise of Alternative Energy Sources: The increasing use of renewables and natural gas has reduced the global reliance on oil.

2. New Oil Producers: Emerging oil-producing nations like Brazil and Canada challenge the traditional dominance of the Middle East.

Impact on the US Dollar

1. Weakening of the Dollar: If oil is priced in currencies other than the US dollar, the global demand for the dollar could decline, leading to potential higher inflation and interest rates in the US.

2. Financial Market Volatility: A decrease in the demand for US Treasury bonds could weaken the bond market and result in financial instability.

Global Financial Order

The end of the petrodollar pact represents a significant shift in the global financial order, highlighting the growing influence of emerging economies and a changing energy landscape. This could usher in a new era where the dominance of the US dollar is no longer guaranteed.

Conclusion

The expiration of the US-Saudi petrodollar agreement marks a pivotal moment in global finance. The long-term implications of this shift remain to be fully seen, but it is clear that the global financial order is entering a new era, with significant challenges and opportunities ahead.




SRIRAM’s



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