'Petrodollar Deal': Did Saudi Arabia Not Renew Deal With US? EXPLAINED

Media reports have stated that a 50-year longstanding Petrodollar deal between Saudi Arabia and the United States has lapsed in July. What does it mean? We explain.

New Delhi: Recently, reports surfaced in the media that a long-standing deal between the United States and Saudi Arabia - touted as the Petrodollar deal lapsed in June 2024. Murmurs around the deal say that the said 'Petrodollar deal' has over 50 years of existence (since established in 1974). 

Media reports further add that, Saudi Arabia's purported refusal to renew the Petrodollar deal, which required top oil producers such as Saudi to price their crude exports exclusively in the American currency has come to pose a serious concern in the global financial markets that could largely be impacted by the position greenback and its subsequent impact on the markets. 

Explanation on the purported 'Petrodollar Deal'

Zeebiz explains, "As part of the deal, Saudi Arabia agreed to trade crude in American dollars (USD) with the US in exchange for military assistance and equipment. The term 'Petrodollar' here implies the dollars earned by oil-exporting nations such as Saudi through trade in the commodity.

Saudi Arabia reportedly entered the arrangement primarily to gain support against Iran and other nations. 

So now, after the deal has lapsed, Saudi Arabia is no longer bound to trade crude in US dollars and can trade in the commodity in any of its preferred currencies. Pertinently, the Gulf nation will now be trading in the commodity in multiple currencies such as the Chinese RMB, the Chinese yuan, the Japanese yen, the Indian rupee (INR), and the euro as against the otherwise exclusive dealing in US dollars."

Clarification of UBS economist on reports of Petrodollar Deal Lapsing

Paul Donovan, the chief economist at UBS Global Wealth Management has in a blog post said, The US and Saudi Arabia did establish a Joint Commission for economic cooperation in June 1974. This aim was to help Saudi Arabia spend its sudden glut of dollars on US products. In July of that year, Saudi agreed to invest oil dollars in US Treasuries (this was kept confidential until 2016)."

He added that Oil has always traded in non-dollar currencies. "In January 2023, Saudi indicated it was happy to negotiate oil sales in other currencies. The possibility changes little for financial markets. Saudi Arabia’s riyal remains pegged to the dollar, and its stock of financial assets are dollar focused. The dollar’s reserve status depends on how money is stored, not how transactions are denominated," he said

Donovan said that the story "is a reminder of confirmation bias" adding that it "seems to have started in the crypto world. Many crypto speculators desperately want to believe in the dollar’s demise. Confirmation bias encourages people to ignore what is realistic if their prejudices are seemingly confirmed. This is a poor investment strategy," he wrote.