IS THE ERA OF THE DOLLAR'S DOMINANCE COMING TO AN END?
According to the Atlantic Council, Saudi Arabia ending the petrodollar agreement could weaken the dominance of the USD in the oil market.
🛢️Petrodollar and the USD’s Role:
The Atlantic Council notes that the potential discontinuation of the trade agreement between the U.S. and Saudi Arabia will reduce the USD’s dominance in the oil market and symbolize a victory for de-dollarization. The 1974 agreement requiring Saudi Arabia to use USD for oil sales has maintained the USD’s crucial role in global trading and financing.
📉Changes Over 50 Years:
Since the petrodollar agreement was signed 50 years ago, much has changed. The U.S. economy’s dominance has waned, with its share of global GDP dropping from 40% to 25% since 1960. Moreover, U.S. reliance on Saudi oil has significantly decreased due to the domestic oil boom.
🌍 Emerging Attractive Markets:
Other markets have emerged, encouraging oil-dependent economies to rethink trade activities. China has become Saudi Arabia’s largest oil partner, accounting for over 20% of its oil exports. Beijing has established strong trade relationships throughout the Middle East, where U.S. influence has waned.
💳De-dollarization:
Consequently, Riyadh has gradually moved towards de-dollarization to reduce USD dominance. Saudi Arabia is a potential BRICS candidate aiming to decouple from the USD and has partnered with China to create mBridge, a cross-border payment system using central bank digital currencies.
⚠️Risks to the USD:
Hung Tran, a non-resident fellow at the Atlantic Council, states that if payment ecosystems like mBridge develop, they pose a real threat to U.S. Treasury liquidity, risking the USD’s global position. He suggests that in such a world, the USD will still “shine” but with less influence, as currencies like the yuan, euro, and yen rise.
That Saudi Arabia's move regarding the petrodollar agreement is a significant indicator of the future of finance, as it was established 50 years ago.
Reference: BI
