If you’re not quite sure what the Petrodollar is, it’s pretty uncomplicated. Back in the 1970’s, at the height of the oil crisis, United States President Richard Nixon conceived an economic master plan. He offered to help defend Saudi Arabia from their burgeoning Middle East rivals. In exchange for that promise, the Saudi kingdom assured all of its oil production be traded in USD (energyandcapital.com).
This strategic stroke of genius helped cement the US dollar as the foremost reserve currency in the world. And while this isn’t the lone reason nations hold onto and trade in American money, it may very well be the most pertinent.
More recently, though, the agreement that created the Petrodollar has become increasingly strained. The Saudi and US alliance is no longer as close as it was under previous administrations. Political and diplomatic differences on issues ranging from human rights and the ongoing catastrophe in Yemen has caused the once tight relationship to become frayed, putting the Petrodollar in danger. In fact, earlier this month discussions between Saudi Arabia and China were developing. Although this isn’t the first time the two countries have tried to supplant the dollar, it is definitely noteworthy, nonetheless (yahoofinance.com).
The International Monetary Fund (IMF) seemingly were spot on when it surmised the war in Ukraine “fundamentally reshaped the economic and geopolitical landscape. If energy trade shifts, supply chains reconfigure, payment methods disintegrate and countries reevaluate their currency reserves.” (Quote courtesy of asiafinancial.com). For example, since the Russian invasion gasoline prices have reached nearly five dollars a gallon in the New York City area.
SAUDI ARABIA and CHINA OIL DEAL
The Wall Street Journal came out with a staggering report noting Saudi Arabia and Beijing are in ongoing discussions about pricing a portion of its oil sales in yuan. A transaction like that could cripple the Petrodollars dominance of the global petroleum market and potentially damage the entire United States financial system. According to the report, the sporadic negotiations that have been taking place the last six years have accelerated this year coinciding with Saudi Arabias growing unhappiness with the wavering of US defense commitments. The Saudis are unhappy with the US lack of support for their role in the Yemen civil war and the Biden administration’s attempt to reignite talks with Iran over their nuclear program.
China purchases 25% of their oil which Saudi Arabia exports. If priced in yuan, those prices could greatly increase the standing of China’s currency, setting in motion the Chinese currency becoming a global Petroyuan reserve. A shift to the yuan could greatly sway the crude market, as currently constituted 80% are done in US dollars. (Info courtesy of CNBC)
China has been courting the kingdom for quite some time, assisting Saudi Arabia construct its own ballistic missiles, consulting a nuclear program and investing in other projects, including the construction of a futuristic city. The dynamics have drastically changed since the US have become one of the top oil producers in the world an unequivocal reversal from the 1980’s when the US exported 2 million barrels of crude a day from Saudi Arabia. As of December 2021 those numbers have fallen to less than 500000 a day. In contrast, China’s oil imports have swelled over the last three decades, in accordance with their burgeoning economy. It appears the “security guarantees” the Saudis have received from the United States since 1974 no longer seems to be much of a deterrent for a chance at an allegiance with China.
What does this situation mean for the average American and the state of the economy? Inflation rates are expected to rise to levels not seen in 40 years, the stock market is a daily, unpredictable roller coaster and now with the threat of the demise of the Petrodollar, the outlook has never been so bleak.
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