Commentary by Michael Snyder
This month, rumors about the petrodollar have spread like wildfire all over the internet. Some of what is being said is true, and some of what is being said is false. When other sources were reporting on “the death of the petrodollar,” I was asked why I was not writing about it. Well, the truth is that I was not writing about it because the petrodollar is not dead. It is certainly in trouble, but it is not dead.
Today, most oil continues to be sold in US dollars, and most global trade continues to be conducted in US dollars. But that could change as other countries lose faith in our currency. In particular, we will want to carefully watch what the BRICS nations choose to do. 45 percent of the world’s inhabitants live in the BRICS nations, and they have been implementing strategies that are designed to promote their own currencies and reduce dependence on the US dollar. As US relations with leading BRICS nations continue to deteriorate, I would expect that trend to accelerate.
So I am not optimistic about the future of the petrodollar at all.
But what some other sources reported about the petrodollar earlier this month was simply not accurate.
Let me start at the beginning. According to Investopedia, petrodollars are “simply US dollars accepted as payment by an oil exporter.”
Petrodollars are oil export revenues denominated in U.S. dollars. Petrodollars are not a distinct currency; they are simply U.S. dollars accepted as payment by an oil exporter.
Global crude oil exports averaged approximately 88.4 million barrels per day in 2020. That pace would generate annual global petrodollar supply of more than $3.2 trillion a year, assuming an average price of $100 per barrel.
Petrodollars are the primary source of revenue and wealth for many members of the Organization of Petroleum Exporting Countries (OPEC) as well as non-OPEC oil and gas exporters including Russia, Qatar, and Norway.
The fact that so many other countries all over the globe use the US dollar to buy and sell oil is a major advantage to us.
Earlier this month, there was a flood of reports that the “50 year petrodollar agreement” between the United States and Saudi Arabia had expired and that the petrodollar was now dead.
But that wasn’t true.
As Peter C. Earle has accurately pointed out, there never was a formal treaty, there never was a formal expiration date, and Saudi Arabia has been trading oil for other currencies for a very long time.
Last week several reports suggested the termination of a US-Saudi petrodollar agreement, and speculated a Saudi Arabian move to sell oil on world markets in various currencies, including the Chinese yuan. The accounts were rife with inaccuracies: the Saudis’ have transacted in non-dollar currencies for decades, and there has never been a formal treaty, much less with a specified expiration date, governing the loose arrangement that has come to be called the ‘petrodollar system,’
Unfortunately, many of the false reports went viral, and Google searches for “petrodollar” spiked to unprecedented level.
Almost immediately, Google searches for the term “petrodollar” spiked to the highest level on record dating back to 2004, according to Google Trends data.
But as speculation about an imminent end to the U.S. dollar’s global dominance intensified, several Wall Street and foreign-policy experts emerged to point out a fatal flaw in this logic: The agreement itself never existed.
At least, not in the way it was being described in the posts that had gone viral on social media.
This is why I take my time and do my research before I report something.
It is so easy to be wrong, but it takes real work to develop a reputation for accuracy.
According to UBS Global Wealth Management chief economist Paul Donovan, the false story about the expiration of the petrodollar agreement “seems to have started in the crypto world,”
Paul Donovan, the chief economist at UBS Global Wealth Management, in a blog post said that the story had gained unexpected traction, serving as yet another example of the dangers of “confirmation bias.”
“The story seems to have started in the crypto world. Many crypto speculators desperately want to believe in the dollar’s demise,” said Donovan.
It is true that a “Joint Commission on Economic Cooperation” was established in 1974.
Originally, it was only supposed to last for five years, but it was “repeatedly extended.”
The agreement referred to by Donovan is the United States-Saudi Arabian Joint Commission on Economic Cooperation. It was formally established on June 8, 1974, by a joint statement issued and signed by Henry Kissinger, the U.S. secretary of state at the time, and Prince Fahd, the second deputy prime minister (and later king and prime minister) of Saudi Arabia, according to a report found on the Government Accountability Office’s website.
The agreement, as initially envisioned, was intended to last five years, although it was repeatedly extended. The rationale for such a deal was pretty straightforward: Coming on the heels of the 1973 OPEC oil embargo, both the U.S. and Saudi Arabia were eager to flesh out a more formal arrangement that would ensure each side got more of what it wanted from the other.
At that time, the US and Saudi Arabia very much needed one another.
Today, circumstances are quite different.
The US is now much less dependent on foreign oil, and the Chinese have become one of the primary purchasers of oil from the Middle East.
Over time, more oil will be bought and sold in other currencies, but for the moment it is pretty much business as usual.
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.
However, as I noted earlier in this article, we need to keep a very close eye on what the BRICS nations are doing.
Saudi Arabia has been deepening relationships with China, Russia, and India, and that is definitely bad news for the US dollar.
Owing to the US and Western Europe’s increasingly entangled alliances, and its own efforts to diversify away from dependence upon energy exports, Saudi Arabia has been increasing its diplomatic and economic engagements with China, Iran, Russia, nations considered primary US foreign policy adversaries. Recent moves toward accepting non-dollar currencies reflects broader geopolitical shifts away from US currency hegemony.
Of course the truth is that if we want to find the biggest enemy of the US dollar all we need to do is to look at ourselves.
The rest of the world is rapidly losing faith in our currency because of what are own leaders are doing to it.
The US dollar is no longer a stable currency. We are creating, borrowing, and spending trillions upon trillions of dollars, and if we continue to act with such extreme irresponsibility everyone else will eventually be forced to switch to new reserve currencies.
According to USdebtclock.org, our national debt will hit 46 trillion dollars on this day in 2028 if we continue to borrow money at the rate we are right now.
That is madness.
We are literally committing economic suicide, but most of the US population is not interested in such warnings.
They just want our leaders to keep flooding the system with more money so that the party can continue.
Yes, the party will continue for a little while longer, but once the lights are finally turned off nobody will ever be able to turn them back on again.
This commentary by author Michael Snyder was originally published on Michael Snyder’s Substack on June 18, 2024.
