Social media is buzzing with reports that the 50-year Petrodollar era between Saudi Arabia and the US ended on June 9 as Saudi Arabia did not extend the deal.
The two countries signed the Petrodollar agreement in 1974, which uses the US dollar only to buy and sell oil, while the US took on the responsibility of ensuring security for Saudi Arabia.
Oil producing countries in the Middle East, which supply oil globally, have established a so-called Petrodollar reuse mechanism by reinvesting USD in US Treasury bonds and financial markets. This process continues to strengthen the Petrodollar system, strengthen the USD's position as a reserve currency and ensure control of the global oil market.
Many commentators on social network X believe that the collapse of the Petrodollar deal will certainly degrade the global reserve currency position of the USD. Certainly, financial fluctuations are ahead.
However, MarketWatch reported that some foreign policy experts and Wall Street have pointed to a deadly loophole in this logic: The Petrodollar deal itself never existed. Or at least, not as it is described in posts circulating on social media.
Paul Donovan, chief economist at UBS Global Wealth Management, said it was clear that the story was fake news. There was an agreement signed in June 1974, but it has nothing to do with currency because Saudi Arabia has since continued to sell oil in British pounds.
The deal, which Donovan mentioned, is an agreement between the US-S Saudi Arabia Joint Commission on economic cooperation. The deal was signed on June 8, 1974 by Henry Kissinger, then-US Secretary of State, and Prince Fahd, second Deputy Prime Minister (and later King and Prime Minister) of Saudi Arabia - according to a report on the Government Accountability Office's website.
The deal is expected to last for five years, although it has been extended several times. The reason for signing the deal is simple: After the OPEC oil embargo in 1973, both the US and Saudi Arabia wanted to make a more formal deal to ensure each side got more than it wanted from the other side.
The surge in oil prices after OPEC's embargo has caused Saudi Arabia to have a surplus of USD and the UK's leaders want to exploit USD assets to continue industrializing their economy outside the oil sector. Meanwhile, the US wanted to strengthen its then-young diplomatic relations with Saudi Arabia, while encouraging the country to reuse the US dollar back to the US economy.
According to Donovan and other experts, a formal deal requiring Saudi Arabia to value crude oil in USD has never existed. More appropriately, Saudi Arabia continues to accept other currencies - most notably the British pound - for oil sales even after the joint economic cooperation agreement with the US in 1974 was signed. It was not until the end of that year that Saudi Arabia stopped accepting payments in British pounds.
Today, China has emerged as one of Saudi Arabia's largest customers. In March last year, China introduced the yuan as a trade payment with Saudi Arabia.
More than 80% of the world's oil is traded in USD. If Saudi Arabia allows the use of the yuan in oil transactions with China, the yuan will increase in value internationally.
China accounts for 1/4 of Saudi Arabia's annual oil exports. The two countries are now BRICS members after Saudi Arabia joined the bloc earlier this year.
