Petrodollar Agreement 1973: A Global Economic Shift

The Petrodollar Agreement of 1973 was a game-changer for the global economy. It marked a significant shift in the way oil was traded and the US dollar's role in international finance.

The agreement was signed between the US and Saudi Arabia, with the US promising to provide military protection to Saudi Arabia in exchange for the kingdom's agreement to price its oil in US dollars. This move effectively pegged the value of the US dollar to the price of oil.

The implications of this agreement were far-reaching, with the US dollar becoming the global reserve currency and the US gaining significant economic influence. The agreement also gave the US a stranglehold on the global oil market, allowing it to exert control over the flow of oil and, by extension, the global economy.

The Petrodollar Agreement of 1973 marked a significant turning point in the history of global finance and set the stage for the US to become the dominant economic power it is today.

The Petrodollar Agreement was a strategic agreement formed between the US and Saudi Arabia in 1974. In the same year, the US and Saudi Arabia signed a military and economic pact, which established joint commissions for economic and military collaboration.

The agreement aimed to stabilize the region and enhance bilateral relations. However, it did not explicitly mention the settlement of Saudi oil in dollars or US oil purchases in exchange for Saudi Treasury investments.

The agreement was a key factor in the petrodollar system, which was established after the collapse of the Bretton Woods system in 1971.

After World War II, international oil prices were based on discounts or premiums relative to oil in the Gulf of Mexico.

The Bretton Woods conference in 1944 had a significant impact on the global economy. The UK and its allies discontinued linking their currencies with gold, but the US dollar continued to be pegged to gold at $35 per ounce from 1941 to 1971.

In 1971, President Nixon cancelled the fixed-rate convertibility of US dollars to gold, leading to the dollar's value deteriorating in comparison to other currencies.

This made fixed USD to local currency exchange rates unsustainable for most countries.

The US dollar's value continued to decline for several years after 1971.

In 1973, OPEC declared an oil embargo in response to the United States' and Western Europe's support of Israel in the Yom Kippur War.

As a result of this embargo, OPEC oil began to be quoted in US dollars, a practice that has continued to this day.

In 1973, OPEC oil was generally quoted in US dollars, sometimes referred to as petrodollars.

Thirty years from now, there will be a huge amount of oil – and no buyers – because the oil age will come to an end not because we have a lack of oil.

After World War II, international oil prices were based on discounts or premiums relative to oil in the Gulf of Mexico. The US dollar continued to be pegged to gold at $35 per ounce from 1941 to 1971.

The US dollar's value began to decline after the collapse of the Bretton Woods system in 1971, which ended the US dollar's convertibility to gold. The US formed a series of strategic agreements with Saudi Arabia and other OPEC countries to stabilize the dollar and maintain its global dominance.

The 1974 agreement between the US and Saudi Arabia established joint commissions for economic and military collaboration, but it didn't mention settlement of Saudi oil in dollars or US oil purchases in exchange for Saudi Treasury investments. Instead, the agreement aimed to create a strategic partnership to stabilize the region and enhance bilateral relations.

The US would purchase oil from Saudi Arabia, and the Saudis would invest their oil proceeds in US Treasury bonds. This agreement was brokered during a four-day layover in Jeddah by US Treasury Secretary William Simon and his deputy, Gerry Parsky, in 1974.

The dollar became the default currency for oil transactions, with approximately 80% of the world's oil transactions priced in US dollars as of 2023.

Approximately 80% of the world's oil transactions are priced in U.S. dollars as of 2023.

Saudi Arabia and other exporters are considering pricing oil in currencies other than the dollar, such as the yuan, due to the rise of the Euro and Chinese yuan.

China has already shifted some of its oil purchases to yuan, and Russia has switched from the dollar to the yuan for much of its commodities trade with China.

The UAE accepted Indian rupees for a crude oil cargo, and Pakistan has been paying for Russian oil with yuan.

Mitigating the risk of accepting yuan as payment for oil deliveries would require that the amount of yuan received as payment would be no larger than the amount needed to finance Saudi imports from China.

If oil-exporting countries decide to accept other currencies for oil or invest their reserves in other assets, it could weaken demand for the U.S. dollar and undermine its status as the global reserve currency.

China launched its first crude oil futures contract denominated in yuan in 2018, creating an alternative "petroyuan" to the petrodollar system.

Russia's economy has done better than many analysts expected despite facing U.S. sanctions, but no country would want the calamities its economy has faced.

The Triffin Dilemma refers to the conflict of economic interests that arises for a country whose currency serves as the world's reserve currency, specifically the tension between the following.

The U.S. dollar's status as the global reserve currency is at risk due to China's erosion of the petrodollar and its shoring up control of the next new top commodity, the Rare Earth Elements.

The petrodollar agreement of 1973 has had a lasting impact on the global economy. Saudi Arabia's decision to price oil in dollars has contributed to the dollar's status as a global reserve currency.

Maintaining a fixed exchange rate to the dollar requires large dollar reserves, which Saudi Arabia has accumulated over the years. The cumulative current account is close to $1.5 trillion, suggesting sizable dollar-denominated holdings.

A shift away from the dollar could have significant repercussions on global financial stability. The wider implications might affect other commodity markets and alter the dynamics of international trade agreements.

Saudi Arabia's dependence on the dollar is tied to its exchange-rate regime, which was pegged to the dollar in 1986. This peg requires the country to hold large dollar reserves to intervene in foreign-exchange markets.

If Saudi Arabia were to price oil in currencies other than dollars, the immediate impact on dollar hegemony would likely be tempered by oil's modest share in global trade.

The petrodollar agreement of 1973 was a game-changer, with the US dollar becoming the global standard for oil transactions. This led to a significant increase in the value of the US dollar.

The agreement was worth $888 billion, which is a staggering amount of money that was agreed upon by the US and Saudi Arabia. This massive deal was a key factor in the US dollar's newfound status as the global reserve currency.

As a result of the agreement, the US dollar became the primary currency used for international trade, particularly in the oil industry. This had a profound impact on the global economy.

The US dollar's value skyrocketed as a result of the agreement, making it a highly sought-after currency.

The petrodollar agreement of 1973 may have been a significant event, but it's often misunderstood. The U.S. and Saudi Arabia agreed on an alliance in 1974, not 1973.

This alliance marked the beginning of the petrodollar era, but it was never a secret agreement until 2016. The petrodollar system's demise is not looming, and the U.S. dollar's strength remains secure despite the gradual diversification of global reserves.

In the mid-1970s, Saudi Arabia's main currency was the British pound, not just the U.S. dollar. The dollar's reserve status depends more on how money is stored than how transactions are denominated.

Saudi Arabia has been at the center of a misinformation story claiming they failed to renew a secret deal with the U.S. to keep oil priced in dollars. This story is a great example of how misinformation can spread quickly.

In 1974, the U.S. and Saudi Arabia did agree on an alliance that led to the petrodollar era. The petrodollar era was not about Saudi Arabia selling its oil exclusively in USD, but rather about denominated transactions in USD.

The Saudi riyal remains pegged to the dollar, and the country's financial assets are primarily denominated in dollars. This is a crucial fact that gets lost in the misinformation.

The dollar's reserve status depends more on how money is stored than how transactions are denominated. This is a key point to understand when evaluating the strength of the dollar.

The petrodollar system's demise is not looming, and the U.S. dollar's strength remains secure despite the gradual diversification of global reserves.

The idea that a dominant reserve currency will eventually collapse under its own weight is a popular doomsday prediction.

This prediction is based on the Triffin dilemma, which states that issuing more currency can undermine its value, while maintaining its value can restrict global liquidity.

The reality is that the advantages of a dominant reserve currency accrue to users immediately, while the drawback happens at a glacial pace with unpredictable timing.

For example, the British pound accounted for 30% of global foreign exchange reserves as late as 1968, almost a century after the U.S. supplanted the U.K. as the largest global economy.

The U.S. economy still accounts for almost a quarter of global gross domestic product, and was more than 40% larger than its nearest rival, China, as of 2023.

A large current account deficit is unavoidable for the issuer of a reserve currency, but the U.S. has been able to maintain this status despite its deficit.

Some factors that can ease stress on the system include the U.S. being a net oil and petroleum products exporter in recent years, and the reshoring process which has reduced the growth of the U.S. trade deficit.

The petrodollar agreement of 1973 had a significant economic impact on the global economy. The deal allowed the United States to maintain its position as the world's reserve currency.

The agreement effectively pegged the price of oil to the US dollar, making it the global standard for international trade. This led to a huge increase in US currency reserves held by oil-exporting countries.

As a result, the US was able to maintain its economic dominance, and the value of the dollar remained relatively stable. The agreement also helped to reduce the risk of a global economic collapse.

The petrodollar agreement also had a significant impact on the global economy, as it led to a huge increase in US government debt. The US government was able to finance its military spending and other activities by printing more money.

The agreement also led to a decrease in the value of the US dollar in terms of gold, as the US was able to maintain its price-fixing mechanism for gold.