Kitco article working now (Kitco News) – The established financial world order of the past 50 years is now transitioning to a new and unknown paradigm as the petrodollar agreement between the U.S. and Saudi Arabia was allowed to expire this past Sunday.
The term ‘petrodollar’ described the U.S. dollar’s (USD) role as the currency used for crude oil transactions on the world market. It traces back to the early 1970s when the United States and Saudi Arabia struck a deal shortly after the U.S. went off the gold standard – and the agreement has had far-reaching consequences for the global economy.
The petrodollar agreement came about following the 1973 oil crisis. It stipulated that Saudi Arabia would price its oil exports exclusively in U.S. dollars and invest its surplus oil revenues in U.S. Treasury bonds. In exchange, the U.S. provided military support and protection to the kingdom.
This helped the USD cement its position as the world’s reserve currency and ushered in an era of prosperity for Americans as they enjoyed the benefits of being the preferred market for global corporations to sell their wares. Additionally, the inflow of foreign capital into U.S. Treasury bonds has supported low interest rates and a robust bond market.
All that is set to change now as Saudi Arabia is looking to move beyond an exclusive relationship with the U.S. – as evidenced by the kingdom becoming one of the newest members of the BRICS bloc.
While many point to escalating global tensions and shifting geopolitical allegiances as the impetus for allowing the agreement to expire, changes in the power dynamics of the global oil market have also played a crucial role in this development as the world moves towards alternative energy sources.
The rise of renewables and natural gas has been steadily reducing the world’s reliance on oil for the past decade, and even oil-rich countries like Saudi Arabia have evolved.
The Kingdom is on track to generate half its electricity with renewables and natural gas by 2030 and plans to plant 10 billion trees as part of a larger goal to reach net-zero emissions by 2060. To achieve this, they have implemented more than 80 public and private sector initiatives representing an investment of over $188 billion.
Their decision to go in that direction has also been influenced by the emergence of new oil-producing nations, such as Brazil and Canada, which have challenged the traditional dominance of the Middle East.