The petrodollar is dead, long live the petrodollar

By Javier Blas

The petrodollar died this month -- or so I learnt via the financial blogosphere. In the past fortnight, Google searches for “petrodollar” have spiked to a record, and viral posts about Saudi Arabia ditching the greenback have ricocheted throughout commodity and currency trading rooms. Apparently, a cataclysmic event has ended American economic hegemony.

For a few days, I resisted the temptation to rebut the chatter. It was pushed by a combination of crypto speculators, gold bugs, conspiracy theorists and, above all, lots of Russian bots on social media. Against them, you can’t win an argument. To whoever asked me, I pointed to a 2023 column where I wrote that the collapse of the petrodollar — and the rise of the petroyuan — was a myth. Oil, I argued, would remain priced in greenbacks.

I had hoped that reality would quickly impose itself: After all, Saudi Arabia is still selling its oil in US dollars more than two weeks after the petrodollar supposedly died. But I was wrong; instead of dying away, the baloney now has traction even inside Wall Street trading rooms and among financial commentators who should know better.

So, here’s what’s happening — and not happening.

First, how it all restarted. A few weeks ago, a number of posts on social media flagged the imminent 50th anniversary of a meeting between American and Saudi officials in Washington on June 8, 1974, that lead to the creation of the so-called US-Saudi Joint Commission on Economic Cooperation. That was, the viral story claimed, the origin of the petrodollar; the day when Washington and Riyadh cut a secret deal to link the black gold and the greenback forever.

But it wasn’t. In reality, Saudi Arabia sold its oil in other currencies, including sterling, until late 1974, when it decided, probably encouraged by the US, to exclusively use the dollar. Even back then, at times the Saudis accepted non-dollar payments for their petroleum, including British fighter planes via the controversial Al Al-Yamamah oil-for-weapons barter deal in the 1980s and 1990s. As London was the seller, the price of the planes was set in sterling.

What the Saudis and the Americans did agree on 50 years ago was to channel the kingdom’s newfound wealth, after oil prices jumped following the first energy crisis, into the US Treasury market.

In its original incarnation, the petrodollar was about recycling oil money, and far less about what currency crude was priced and invoiced in. The Saudis poured money into American sovereign debt, helping Washington to finance its deficits, and in return the US offered secrecy about the financial dealings and military protection.

Half a century ago, the Saudis had lots of money and little domestic capacity to absorb it. In 1974, the country’s current account surplus was worth more than 50 per cent of its gross domestic product. The petrodollar reflected that massive surplus. The US didn’t benefit because Saudi Arabia priced its oil in dollars, but because it recycled those funds into the American debt market. The natural outcome of those flows was a stronger American currency.

In that sense, the petrodollar died long ago — and few noticed. Probably, it stopped having a significant influence on global financial markets about three decades ago, if not even earlier. Even during the price spike between 2003 and 2008, the value of dollars recycled into American debt instruments was very limited, as OPEC nations had the capacity — and need — to use their wealth at home, spending the money on imports of goods and services.

Fast forward to today, and Saudi Arabia doesn’t have a surplus to recycle at all. Instead, the country is borrowing heavily in the sovereign debt market and selling assets, including chunks of its national oil company, to finance its grand economic plans. True, Riyadh still holds significant hard currency reserves, some of them invested in US Treasuries. But it’s not accumulating them anymore. China and Japan have significant more money tied up on the American debt market than the Saudis do.

From a peak of 50 per cent of its GDP, the Saudi current account surplus will narrow to just 0.5 per cent this year, according to the International Monetary Fund, before shifting into deficit as soon as 2025 and until the end of the decade. If confirmed, it would be the longest current-account deficit for the kingdom since Riyadh flooded the market in 1986, triggering a price collapse.

Without oil surpluses to recycle, there’s no petrodollar to speak of. If the US dollar is strong – and it is, with the dollar index at one of its highest values in two decades – it isn’t because the Saudis are financing the American deficits.

Granted, Saudi oil remains priced in greenbacks, and Saudi Aramco, the kingdom’s state-owned company, invoices everyone in dollars, too. But that’s a minor part of what the petrodollar once was. I don’t think that’s the reason why the dollar is strong, or why the US is the strongest nation in the world, exporting its economic, military, scientific and cultural might. Do those petrodollar-had-died naysayers truly believe that if the Saudis priced their oil in any other currency Hollywood would go away? Or Wall Street? Or Silicon Valley? Or the Pentagon? Please!

Even in this diminished role, I don’t expect the petrodollar to die anytime soon. In my conversations in the Middle East, I don’t sense any desire to shift away from the American currency for oil sales. Importantly, the Saudis keep their currency pegged to the greenback, too. Right now, the royal family is busy trying to cut a deal with the White House to revive the Saudi-American relationship, and as part of that process, keeping Saudi oil priced in dollars would make sense.

Shifting to other currencies has more problems than advantages – and by other currencies I mean the euro, sterling, the Swiss franc or the yen. Embracing the Chinese currency, as the blogosphere suggests, would be even more difficult. The greenback is freely convertible, the yuan isn’t; the dollar is liquid, the yuan isn’t. Enough said.

The chatter about the Saudis thinking about using other currencies is perennial. Here’s a front-page headline from The New York Times: “OPEC WILL SEVER LINK WITH DOLLAR FOR PRICING OF OIL.” The publication date? June 10, 1975. Perhaps next year we can celebrate the 50th anniversary of that very premature news report, and let the blogosphere go wild — again.