The end of American hegemony: Saudi Arabia shatters the petrodollar agreement

The Transition Away from the Petrodollar Agreement

Over the past fifty years, the established global financial order has been undergoing a transition towards a new and undefined paradigm.
This shift was marked by the expiration of the petrodollar agreement between the United States and Saudi Arabia last Sunday.

The Petrodollar Agreement Origins

The term “petrodollar” identified the role of the US dollar (USD) as the predominant currency for oil transactions on international markets.
This agreement dates back to the early 1970s when the US and Saudi Arabia reached a deal shortly after the US abandoned the gold standard, significantly impacting the global economy.

Implications of the Agreement

The petrodollar agreement emerged following the 1973 oil crisis, establishing that Saudi Arabia would price its oil exports exclusively in US dollars and invest its oil surplus proceeds in US Treasury bonds.
In return, the US provided military support and protection to the kingdom.

Changing Dynamics

However, everything is now changing as Saudi Arabia looks beyond its exclusive relationship with the US, as evidenced by its recent alignment with the BRICS bloc.
The decision to let the agreement expire is attributed to growing global tensions, shifts in geopolitical alliances, power dynamics in the global oil market, and the transition to alternative energy sources.

Rise of Renewable Energy

The rise of renewable energies and natural gas has gradually reduced global dependence on oil in the last decade.
Saudi Arabia aims to produce half of its electricity from renewables and natural gas by 2030, with plans to plant 10 billion trees as part of a broader goal to achieve net-zero emissions by 2060.

Impact on Global Economy

The move away from the petrodollar agreement could significantly weaken the dollar’s dominance in the oil market and, consequently, its global position.
This shift could lead to higher inflation, elevated interest rates, and a weaker bond market in the US, potentially accelerating the move away from the US dollar as the default global reserve currency.

The mBridge Project and Financial Governance

Against the backdrop of Saudi Arabia’s involvement in the mBridge project, an ambitious initiative exploring the use of a multi-central bank digital currency platform, there are broader implications for the future of financial governance and the role of digital technologies in economic frameworks.

The Future Landscape

The end of the petrodollar agreement is not just a closure of a chapter in US-Saudi economic history but also a clear indication of the shifting paradigms in global financial systems and the potential impact on international trade and finance.