Started in 1974, a tacit agreement maintained the price of oil in dollars for 50 years and helped to consolidate the currency as the main global reference
The specialized media in the United States take for granted the end of “petrodollars”, the country’s pact with Saudi Arabia that established the dollar as the official currency in oil transactions. Signed in 1974, this tacit agreement between the 2 countries consolidated US economic hegemony and the attractiveness of its titles.
The term “petrodollars” refers to US dollars received by oil-exporting countries through the sale of the commodity. The price of oil began to be established in North American currency. Payment to exporters in other currencies followed the exchange rate in relation to the dollar.
The assessment that the agreement has lost its strength is based on moves by the Saudi government to sell oil priced in different currencies, such as the euro, yuan and even cryptocurrencies.
There is no document signed between countries that determines the use of the dollar as a reference. This monopoly was built by the USA and Saudi Arabia through diplomatic negotiations in the 1970s. The dollar’s interdependence with oil had already been established since the USA delinked its currency from gold in 1971.
The end of the “petrodollar” era represents a shift in power in global markets. The dollar will continue to be the strongest currency in the short and medium term. But the willingness of Saudi Arabia – leader of OPEC (Organization of Petroleum Exporting Countries) – trading oil in other currencies takes away the comfort of North Americans as a reference in the market.
For 50 years, the planet’s main commodity was traded for a currency that only the USA had the authority to issue. This forced all countries to accept the effect of this on the price of oil. An oil-importing country whose currency depreciates against the dollar has to pay more for the commodity. An oil exporting country whose currency loses value to that of the US receives less for its sales. The trend now is for importing and exporting countries to have the alternative of using other currencies for contracts. This helps to diversify risk.
The connection with oil helped to naturalize the dollar as a global reference. The North American currency began to play a more important role in world monetary reserves and in commercial transactions involving several other products. This also increased interest in US government bonds and strengthened the US financial system.
In a process known as “petrodollar recycling,” oil exporters invest their dollars in the US financial system. These countries buy US treasury bonds and other assets in dollars because of the security of the currency. The increase in demand for US bonds is one of the factors that helps the United States maintain its more attractive interest rates.
The Saudi move to expand operations to other currencies is a victory especially for China. The Asian country is the largest buyer of Saudi oil and will be able to continue trading with its own currency, reducing the need for dollar reserves.
The biggest loser from the end of the “petrodollars” is US President Joe Biden. The loss of American influence in a highly strategic sector 5 months before the presidential elections is an issue that should be explored by his opponent Donald Trump.
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