End of 50-Year US/Saudi Petrodollar Agreement. Implications?

[Markola]

“This expiration has far-reaching implications, as it has the potential to disrupt the global financial order.”

https://www.nasdaq.com/articles/us-saudi-petrodollar-pact-ends-after-50-years

Saudi Arabia will diversify currencies for its oil sales from solely the dollar to yuan, rubles, yen, digital currencies and others. I can’t say I fully grasp the implications. On one hand, the agreement has resulted in a strong dollar, which has made it the world reserve currency and has been good for imports’ purchasing power. On the other hand, the strong dollar from this 50 year agreement has contributed to the decline of U.S. manufacturing over that same period, because our exports have been relatively expensive.

What do you think this change will mean?

 

[MichaelB]

There is no evidence any pact or agreement ever existed, it is and always has been a combination of media hype and speculation with a fair amount of conspiracy thrown in.

I’m quite doubtful.

For the last 10 years Saudi Arabia has not added to its fixed income reserves. Instead, it has been putting the surplus into other international assets, mostly equities, mostly US. It has also significantly increased its own spending. This is not new and has little impact on the US$ as a reserve currency.

The strength of the US$ is the result of many factors, one of which is Saudi Arabia, but that is a minor contributor at best. Far more significant are the mercantilist trade policies of other important global economies, both developed and developing.

 

[Qs Laptop]

From the article:
The petrodollar’s expiration could weaken the U.S. dollar and, by extension, the U.S. financial markets. If oil were to be priced in a currency other than the dollar, it could lead to a decline in global demand for the greenback. This, in turn, could result in higher inflation, higher interest rates, and a weaker bond market in the United States.

Oh? And what currency is stronger than the US dollar that all these other countries are going to abandon the dollar for and flee for safety in?

Also, the USA is now the world's largest producer of crude oil. So if other countries want to buy our oil, guess what currency they are going to need to use?

 

[sengsational]

This petrodollar agreement, to the extent it existed and did much, has been getting less important now that we don't need the Saudis any more. The US exports oil now. The feds would like rich people to have pallets of 100 bills (the narcodollar) and US Treasuries sourced from Saudi oil sales, but that's just the Fed. Nobody wants PM's all that much, and there's no other fiat currency that makes any sense.

The expiration is a nothing-burger except to the sales people that can use the news to churn some accounts on fear.

 

[GrayHare]

Such a connection, if it existed, meant the act of printing dollars inflated our economy more quickly than it otherwise would have because energy immediately became more expensive to import, and the cost of energy is priced into just about everything. Conversely, a disconnect between oil and the dollar, either by pumping our own oil out of the ground or by the expiration of agreements, will tend to dampen changes in the economy caused by changes in the value of the dollar.

 

[JBTX]

I’ve been hearing about the so called erosion of the US dollar as the world’s currency for at least a decade. The narrative is that countries will conduct transactions in other currencies and that somehow will lead to an erosion of the dollar and maybe hyperinflation. That is non sense.

The US still dominates the world in terms of currency reserves. Its share is slowly getting smaller, but that is as much due to a growing world economy. For all of our economic faults there isn’t anybody else even close to being able to take over that role.

Krugman had an article years back and his take is “so what”? You look at other European countries, the UK, Australia and their currencies and economies aren’t in chaos due to currency issues. They don’t have materially higher interest rates.

To the extent transactions are done in other currencies we lose a bit of control in situations like Ukraine/ Russian war but circumstances have shown that those advantages are overrated anyway.

 

[Markola]

To the extent transactions are done in other currencies we lose a bit of control in situations like Ukraine/ Russian war but circumstances have shown that those advantages are overrated anyway.

The west, having seized Russia’s $600B reserves, IIRC, as part of the Ukraine invasion sanctions did put the world’s authoritarians on notice that this, too, could be them if they get crosswise with Washington. I’m all for sending that Russian money to help Ukraine but it is also understandable that BRICS nations and others would want to experiment with alternatives to the dollar. I agree with the others here who’ve said that there isn’t a good one.

 

[Al18]

FYI US Oil Production was 48% higher than Saudi Arabia as of December, 2023 according to Wiki

Not sure the agreement matters, as the US will only accept US dollars when we sell our oil.

 

[Markola]

So, nothingburger. OK. It seems that oil doesn’t matter as much, especially when we drill so much now.

The way things are today, it’s probably more important to US power that Nvidia is a US company.

 

[marko]

Y'know, this is what I love about this forum. I had read another article about this on X and saw a lot of comments.

I didn't know enough as to whether this was concerning or not.

The collective wisdom here always cuts through the BS.

 

[Koolau]

I tend to agree that there is no immediate cause for "alarm" but the issue I see (off in the future, someplace) is the likely steady "attack" on the dollar as the world currency reserve. BRICS is sort of a "first salvo" in the organized/disorganized attack. The "world" constantly weighs the positives and negatives of the USA having currency dominance and eventually will decide there is more downside than upside. If this happens when BRICS becomes BRICSABCDEFG..., all bets are off IMHO.

Right now, other countries probably prefer but also (rightly??) resent the power our currency gives the USA. Given the chance, the dollar will eventually be supplanted. Maybe not in 5 years or 10 years - but 25 years? 50 years?? Who knows. But I strongly suspect it will eventually happen.

The concept shouldn't be ignored simply because it's not imminent (IMHO.) If currency dominance ultimately depends on who has the most oil, we might be talking Venezuelan Bolívars as reserve currency some day.

I'm not smart enough and certainly not educated enough to know what to "do" to retain currency dominance, but ignoring it is unlikely to end well - somewhere off in the future.

I claim no expertise in the subject and I mostly go on the fact that countries look out for themselves when it comes right down to it. "Loyalty" is actually spelled "self interest" IMHO. But YMMV.

 

[Closet_Gamer]

Good thread. Like so many things, I think we see the downside more quickly than the upside. If the dollar's value has been propped up by this or other forces, that helps keep inflation down. But it also suppresses domestic manufacturing and facilitates globalized outsourcing. The dollar is unlikely to implode which means a steady erosion in value would trigger a steady rebalancing/investment domestically. Ying-Yang.

The virtue of our market economy is that a lot of this would just happen through millions of incremental, free market optimizations.

I believe the best way to hedge a dollar decline is to hold international equities. I continue to do this with a tilt towards dividend-producing equities to ensure some on-going value even if international equities continue to underperform along the way.

 

[MichaelB]

On the other hand, the strong dollar from this 50 year agreement has contributed to the decline of U.S. manufacturing over that same period, because our exports have been relatively expensive.

There is indeed a strong correlation between a strong US$ and decline in US manufacturing, but the causation is the opposite of this. The increase in manufacturing imports causes the strong US$.

The manufacturing exporter (Japan, Germany, Taiwan, Netherlands, etc) exports and then suppressed domestic demand, so the export earnings are not used to import other goods and a trade surplus results. The exporter Central Bank buys the foreign currency from the exporter and invests it in US Treasuries. This stops the exporter currency from rising and explains why so many countries have such large US$ reserves. They have no other choice, because if they sell those $$ their own currencies will rise and they will become less competitive.

 

[Markola]

^^^^^^ I follow that. It’s fascinating to see the logical market reasons for US manufacturing decline beneath the typical media and politician explanations of “greedy unions” and “greedy corporations”. There is no one to blame, really.

If we want manufacturing to come back, it probably requires a weak dollar, which means other problems.

But maybe this concern is all wrong, because, to the contrary of those same media and politicians, the US is, in fact, one of the world’s very top manufacturers, like top 2-3 or so. But more of it is automated and doesn’t require as much manual labor. And much of it is consumed here in the US.

Yet another paradox is the Resource Curse, which afflicts oil exporting nations by making their currencies strong, causing them to be wealthy enough to import a lot but remain undeveloped. We’re now a top petroleum exporter, so maybe we are suffering/benefiting from that dynamic more than ever now too.

 

[street]

Wow!
Another great informative thread. Very interesting to say the least. Thanks for the read.

 

[MichaelB]

^^^^^^ I follow that. It’s fascinating to see the logical market reasons for US manufacturing decline beneath the typical media and politician explanations of “greedy unions” and “greedy corporations”. There is no one to blame, really.

If we want manufacturing to come back, it probably requires a weak dollar, which means other problems.

But maybe this concern is all wrong, because, to the contrary of those same media and politicians, the US is, in fact, one of the world’s very top manufacturers, like top 2-3 or so. But more of it is automated and doesn’t require as much manual labor. And much of it is consumed here in the US.

Blame falls squarely on the shoulders of the exporters who deliberately run a trade surplus (Germany, Japan, Taiwan, S Korea, Netherlands, and of course, China). If they choose to continue there’s little we can do, This is why tariffs usually don’t work for advanced economies. Warren Buffet’s suggestion to limit imports to only the amount exported by way of vouchers is clever and would certainly help.

Would we like some of those jobs back? You bet we would. Autos, for example, would probably generate more than 1M new jobs.

The trade deficit also leads to increased public debt, $ for $. If you look at the US primary deficit, it’s pretty much the same amount as the tread deficit. Not a coincidence.

 

[Markola]

Yes. But if it’s in those countries’ best interest, who can blame them? Meanwhile, our US debt and deficits mushroom because of our trade policy, putting the lie to the reasons the media love:

- Evil corporations and their respective politicians
- Evil unions and their respective politicians
- Insanely high corporate taxes and regulations
- Excessively expensive public assistance programs and we just need to cut government spending

Our debt and deficits are the evil twin and result of our otherwise desirable and intentional strong dollar policy over many decades - the flip side of making the dollar the global reserve currency. There is no free lunch in nature or economics.