The term “petrodollar” refers to the practice of pricing and trading oil in U.S. dollars. This system began in the early 1970s when the U.S. made an agreement with Saudi Arabia to price all of its oil sales in U.S. dollars. In return, the U.S. provided military and economic support to Saudi Arabia. This agreement ensured that the global oil trade would be conducted in dollars, solidifying the currency’s dominant position in international finance.

Importance of the Petrodollar

The petrodollar system has significant implications for the U.S. economy:

  • Global Demand for the Dollar: Since oil is priced in dollars, countries need to hold large reserves of U.S. dollars to purchase oil. This consistent demand helps maintain the dollar’s value and stability.
  • Economic Influence: The U.S. retains substantial influence over the global financial system because oil transactions are conducted in dollars. This supports the dollar’s status as the world’s primary reserve currency, providing the U.S. with economic and geopolitical leverage.
  • Inflation Control: Global demand for dollars helps keep U.S. inflation rates lower. When other countries hold and use dollars, it reduces the amount of currency circulating within the U.S., aiding in inflation control.
  • Financing Deficits: The demand for dollars allows the U.S. to finance its trade and budget deficits more easily, as other countries are more likely to purchase U.S. debt, enabling the country to borrow at lower interest rates.

Recent Media Reports on Saudi Arabia and the Petrodollar

There have been reports suggesting that Saudi Arabia might be reconsidering its commitment to selling oil exclusively in U.S. dollars, raising questions about the future of the petrodollar system.

India Today reported that the 50-year-old petrodollar agreement between Saudi Arabia and the U.S. expired on June 9, 2024, allowing Saudi Arabia to potentially sell oil in other currencies. This could weaken the dollar’s global dominance.

Eurasia Business News confirmed that Saudi Arabia did not renew the petrodollar agreement, opening the door for oil transactions in other currencies, which could impact the global financial system and the U.S. dollar’s status.

PolitiFact examined claims that Saudi Arabia would let the petrodollar agreement expire. Experts indicated that no formal agreement between the U.S. and Saudi Arabia was known to exist, suggesting that the petrodollar concept might be more informal. Read more

Radio Free Asia discussed claims on Chinese social media that the petrodollar agreement had expired, though these claims lacked concrete evidence.

Global Law Today noted that many media outlets have reported the end of the petrodollar era, questioning whether a formal agreement ever existed. Read more

Andy Schectman’s Insights on the Petrodollar and Global Finance

Michelle Makori, Lead Anchor and Editor-in-Chief at Kitco News, recently interviewed Andy Schectman, President and Owner of Miles Franklin Precious Metals, about the alleged expiration of the petrodollar agreement and its implications. Schectman believes that this marks the end of the era of fiat currency, with a return to commodity-backed money.

Schectman emphasized that this shift could lead to significant changes in the global financial system. He predicted that as countries no longer need to hold U.S. dollars to purchase oil, these dollars will return to the U.S., causing higher inflation and potentially higher interest rates:

“There are way more dollars outside the U.S. than inside because of stockpiling of the greenback to buy oil for 50 years,” Schectman said. “As those dollars come home and are sold back to the issuer – because no one wants to hold them anymore as they are no longer a necessity to buy oil – inflation rates would go higher and higher. As those currency units are added to the currency base, it would raise interest rates…

“The dollar would collapse, the stock market would collapse, the bond market would collapse, the banking system would collapse, the insurance companies would collapse. Everything. This is the great reset.“

Schectman also discussed the broader geopolitical context, including sanctions against China and Russia, the weaponization of the U.S. dollar, and the accelerating de-dollarization trend. He pointed out that the BRICS nations’ meetings reflect changing global dynamics, with the potential adoption of a new BRICS currency and Saudi Arabia’s involvement further undermining the dollar’s dominance.

He highlighted gold’s role in this new financial landscape, suggesting that we are moving towards a system identified by commodities and transparency. Schectman argued that the de-dollarization trend will continue, driven by geopolitical and economic factors, with central banks buying gold at record levels and reducing their U.S. dollar reserves.

Featured Image via Pixabay