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50-Year Petrodollar Pact Comes To An End

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Recent reports indicate that the United States and Saudi Arabia’s 50-year-old petrodollar deal has expired, causing a major change in the global economic environment. The termination of this long-standing agreement, which mandated Saudi Arabia to value its oil shipments only in US dollars, may have significant effects on the dollar’s hegemony in global trade as well as the emergence of alternative currencies.

Origins Of The Petrodollar System

Following the 1973 oil crisis, the United States and Saudi Arabia came to an agreement to stabilize the world oil market, which led to the establishment of the petrodollar system. As per the terms of this agreement, Saudi Arabia committed to pricing its oil exports only in US dollars and allocating its excess oil earnings to US Treasury bonds. The United States gave the kingdom economic cooperation and military support in exchange. This arrangement strengthened the dollar’s position as the world’s principal reserve currency, enabling the United States to continue leading the economy and maintaining low interest rates.

Saudi Arabia’s Change In Currency

Saudi Arabia now has the freedom to sell oil in a variety of currencies, such as the Chinese yuan, euros, yen, and others, thanks to its decision to not extend the petrodollar agreement. This action fits in with Saudi Arabia’s larger plan to use digital advances and a variety of financial instruments to deepen its integration into the global economy, diversify its economic ties, and lessen its reliance on the US dollar. The change is also a reflection of the expanding power of emerging countries and the evolving energy scene, as the need for oil is being reduced by developments in sustainable energy technologies and worries about global warming.

Effects On International Finance

If more oil transactions are made in other currencies once the petrodollar pact expires, this might reduce the US dollar’s hegemony in international trade and raise interest rates and inflation domestically. As nations look to lessen their reliance on the US dollar, this move may also hasten the trend of de-dollarization and emphasize the rising power of developing economies like China.