patrick.net

President Nixon and King Faisal reach agreement leading to the PetroDollar (1974).

With great sorrow, we announce the death of our dear friend and colleague, the PetroDollar. Petro passed from this financial plane on June 9th,2024, at just 51 years of age.
Petro will be sorely missed.
Signed,
Wall Street, USA

Although tongue-in-cheek, this reflects the feelings of many on Wall Street, who have already figured out what the loss of the PetroDollar will mean to America’s finances.

The PetroDollar was an agreement between the United States and Saudi Arabia to trade oil in US Dollars. It was signed just over a year after the Saudi-led Organization of Petroleum Exporting Countries (OPEC) sent the US Economy into a tailspin when it “embargoed” (reduced supply/increased price) oil to America.

President Nixon bargained with the Saudi King to sell their oil only in US Dollars. In return, Saudi Arabia promised to keep the price of oil reasonable, and the US promised military and financial support. It was a win-win agreement. Saudi Arabia strengthened its military and financial situation, while the US would not have to face the devastating effects of another embargo.

There was one other benefit for the US that would ultimately prove even more valuable than steady oil prices. The Saudis helped create a financial model where not only oil but nearly all international settlements would be made in US currency. Although the US Dollar had been the World’s reserve currency since the 1944 Bretton Woods Agreement, this new Saudi-US PetroDollar Agreement confirmed the Dollar’s preeminent position 30 years later. ...

It’s not a bad deal when you think about it. The country that likes to spend the most (the US) has other countries lend them the money. For about half a century, this arrangement worked like a charm for the US.
However, the Dollar’s preeminent position worldwide changed when Biden became president. Reacting to the Russian invasion of Ukraine, Biden slapped a series of sanctions on Russia. Russian sanctions were nothing new; the first sanction on Russia went back to President Obama signing Executive Order #13660 in March 2014. ...

The assumption was that by removing Russia from SWIFT, it would not be able to sell its oil overseas. Biden would have cut off the chief source of Russian international trade and finance. However, ultimately, Biden shot at the Russian oil trade and hit the PetroDollar instead.

Meanwhile, Crown Prince Mohammed bin Salman saw it all: how the Biden Administration first cut off all Russian oil sales and then tried to ruin all of Russia’s trade financing. MBS had to wonder if America would do this to OPEC’s number two oil supplier, Russia, would they do it to Saudi Arabia?

In the end, what the Biden Administration failed to see was that both China and India would line up on Russia’s side and become its most significant customers. Swift and PetroDollar instantly lost 20–40% of their customer base, while Russia went on to sell its oil to the Global South. ...

At the very least, American leaders should have realized that they transformed the internationally traded US Dollar from a non-partisan, neutral trading vehicle into a financial weapon. Once that line was crossed, there was no going back.

Yesterday, the 50-year PetroDollar Agreement expired. It was part of the complex web of global finance that supported the Dollar’s preeminent position as the Reserve Currency. Not a word was heard from either Saudi Arabia or the United States, the two signatories. Perhaps it's an indication of how far the Dollar has already fallen.