Fake News: Saudi Petrodollar Deal With US Ended This Month – Ledger Insights

There is a fake petrodollar news circulating that Saudi Arabia and the United States had a 50-year contract in which Saudi Arabia agreed to settle all its oil sales in U.S. dollars. Apparently, this should foreshadow the end of dollar dominance and would be good for cryptocurrency prices. Except that no such agreement existed.

It's tricky to verify something that doesn't exist. However, David Wight, an academic who wrote a book on the petrodollar, told us that this agreement does not exist. He looked through declassified documents to write his book.

Like all effective fake news, some aspects contain shards of truth. For example, Saudi Arabia has effectively joined mBridge, the cross-border central bank digital currency project involving the central banks of China, Hong Kong, Thailand and the United Arab Emirates. And mBridge does not plan to support dollar payments at this time.

Another Saudi-American pact of 1974

There is also a 1974 agreement between Saudi Arabia and the United States. However, this did not require Saudi Arabia to use dollars to sell oil. No declassified document indicates an end date either.

So what was the purpose of the 1974 treaty? In short, the United States agreed to sell high-tech weapons to Saudi Arabia. In exchange, Saudi Arabia agreed to invest its excess cash in Treasury bonds. At one point in the 1980s, the oil kingdom held 30% of the U.S. Treasury debt. Since then, the U.S. national debt has exploded and currently stands at just under $35 trillion. The official figure for Saudi holdings of Treasury bonds is $136 billion, which represents significantly less than 1% of the national debt.

The dominance of the US dollar

The reason the dollar is the dominant currency for oil, the petrodollar, is that the dollar generally dominates all cross-border transactions. As a byproduct of the dollar's network effect, everyone uses the dollar, so the best exchange rates are always quoted against the dollar.

According to Swift, 47% of international payments using its messaging system are in US dollars, with this figure rising to 59% if transactions between Eurozone countries are ignored. Another measure of a currency's importance is government and central bank holdings. The US dollar represents 58% of reserves, according to the IMF, followed by the euro with 20%. China's renminbi is in sixth place, at just over 2%. However, the US dollar's share of reserves has eroded significantly over the past 25 years, from around 72%.

Attempts to break away from dollar dominance will have to absorb higher foreign exchange costs. Therefore, even though mBridge could indeed be a faster and more efficient payment method, the exchange rates could be sub-optimal.

For Saudi Arabia, there is another consideration. Its currency, the Saudi riyal, is pegged to the dollar. There is therefore an incentive to stick with the US dollar from an economic stability perspective.

China flexes its trade muscles

The fake article implies that Saudi Arabia can suddenly price its oil in renminbi rather than dollars, when it has always been free to do so. However, there could be increased pressure to use alternative currencies. For Saudi Arabia, China is today a much more important oil customer than the United States. Additionally, following Russia's invasion of Ukraine, Russia prices a large portion of its Chinese oil sales in renminbi. China has recently seen record international trade using the renminbi against the dollar, but much of this has to do with the side effects of the war in Ukraine. Currently, many Chinese oil buyers are balking at the high prices of Saudi oil compared to those of Russia.

This is not to say that China does not have greater ambitions when it comes to currency. The internationalization of the RMB is a frequently mentioned strategy. Even Swift data shows that the RMB's share of international payments has more than doubled over the past five years, from 2.15% to around 4.5%. China views the broader BRICS trade grouping as a useful tool for the RMB.

BRICS and local currencies for trade

Saudi Arabia also joined BRICS, although after the first announcement it said it had not yet finalized its participation. However, he reportedly attended meetings. One of the current goals of BRICS is to rely more on local currency transactions and avoid the dollar.

One-time BRICS membership could be seen as another Saudi bargaining chip in recent negotiations over a controversial new US-Saudi arms and defense deal. Alternatively, Saudi Arabia's hesitation could be influenced by the presence of another new BRICS member – Iran – with which it was recently embroiled in a proxy war in Yemen.

Although the currency and cross-border payments segments are certainly increasingly fragmented, there has been no agreement between Saudi Arabia and the United States on petrodollars, so this is not a factor . It appears that the dollar's dominance, although gradually weakening, will persist for some time.

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