The long-standing Petro dollar agreement between Saudi Arabia and the US expired on June 9th, 2024, marking an end to a 75-year economic system.
Impact of the Petro Dollar System
Historical Context: For over 75 years, the Petro dollar system has significantly influenced global economics and trade, centralizing the US dollar as the world’s reserve currency.
Global Trade: The system was essential for international trade and economic stability, ensuring the US dollar was the primary currency for oil transactions.
Historical Evolution of World Reserve Currencies
1720-1815: French Libra was predominant.
1815-1920: British Pound took over.
Post WWII (Bretton Woods Agreement): US dollar became the world reserve currency.
Benefits of Being the World Reserve Currency
Economic Stability: Facilitates international trade by providing a common currency.
Rising Asset Prices: US benefits from countries parking wealth in safe assets like treasury bonds.
The Saudi Arabia-US Agreement
Original Deal: Initiated by Nixon and Kissinger, it involved the US offering arms and protection to Saudi Arabia in exchange for oil transactions conducted in USD.
Importance: This arrangement helped the US control global trade and maintain the dollar’s dominance.
Shift in Global Trade
Current Trends: Countries are shifting away from using the US dollar for international trade and oil transactions (e.g., Saudi Arabia seeking BRICS membership).
Implications:
Potential depreciation of the dollar’s value.
Rising costs for the US due to higher interest rates and inflation.
Strain on the US economy, including higher borrowing costs and weaker financial markets.
Examples of Economic Instability
Greece, Syria, Lebanon, Argentina, South Sudan: Instances where countries faced economic collapse due to currency devaluation and inflation, leading to higher interest rates and borrowing costs.
Long-term Outlook
Global Reserve Status: Though the role of the US dollar may diminish gradually, it is unlikely to be replaced entirely by another currency soon.
Current Data: The US dollar still holds a significant portion of global foreign exchange reserves (59%), compared to the euro (20%) and Chinese yuan (3%).
Investment Strategies: Diversifying investments can mitigate risks (e.g., stocks, bonds, real estate, Bitcoin as a potential hedge).
Conclusion
Despite the agreement ending, the US dollar retains substantial influence due to global trust and heavy reliance in international transactions.
Personal strategy: Focus on controlled investments and pay attention to global economic changes.