The petrodollar is dead, long live the petrodollar

For several days, I resisted the temptation to refute the talk. It was being pushed by a mix of crypto speculators, gold bugs, conspiracy theorists, and, most importantly, lots of Russian bots on social media. You can’t win an argument against them. Whoever asked me about it, I pointed to a column from 2023 in which I wrote that the collapse of the petrodollar – and the rise of the petroyuan – was a myth. Oil, I argued, would continue to trade in greenbacks.

I had hoped that reality would soon set in: after all, Saudi Arabia is still selling its oil in US dollars more than two weeks after the supposed death of the petrodollar. But I was wrong; instead of dying down, the nonsense has now gained traction even in the trading floors of Wall Street and among financial commentators who should know better.

So here’s what’s happening – and what’s not happening.

First, how it all started again. A few weeks ago, several social media posts drew attention to the upcoming 50th anniversary of a meeting between American and Saudi politicians in Washington on June 8, 1974, that led to the creation of the so-called Joint US-Saudi Commission for Economic Cooperation. This, the viral story goes, was the origin of the petrodollar; the day Washington and Riyadh struck a secret deal to forever link the black gold to the greenback.

But that was not the case. In fact, Saudi Arabia sold its oil in other currencies, including pounds sterling, until late 1974, when it decided – probably encouraged by the US – to use the dollar exclusively. Even then, the Saudis at times accepted other forms of payment for their oil, including British fighter planes as part of the controversial Al-Yamamah oil-for-arms exchange in the 1980s and 1990s. Since London was the seller, the price of the planes was set in pounds sterling.

What the Saudis and the Americans actually agreed on 50 years ago was to channel the kingdom’s newfound wealth into the US Treasury bond market after the oil price soared following the first energy crisis.

In its original form, the petrodollar was about recycling oil money rather than the currency in which crude oil was priced and billed. The Saudis pumped money into American government debt, helping Washington finance its budget deficits. In return, the United States offered secrecy in financial transactions and military protection.

Half a century ago, the Saudis had a lot of money and little domestic capacity to absorb it. In 1974, the country’s current account surplus was more than 50 percent of its gross domestic product. The petrodollar reflected this massive surplus. The United States benefited not from Saudi Arabia pricing its oil in dollars but from it returning these funds to the American debt market. The natural result of these flows was a stronger American currency.

In this sense, the petrodollar has been dead for a long time – and few have noticed. It probably stopped having a significant impact on global financial markets some three decades ago, if not earlier. Even during the price increase between 2003 and 2008, the value of dollars exchanged for American debt was very limited, as OPEC countries had the opportunity – and the need – to use their wealth at home and spend the money on importing goods and services.

Today, Saudi Arabia has no surplus at all to recycle. Instead, it borrows heavily on the government bond market and sells assets, including parts of its national oil company, to finance its grand economic plans. Riyadh still holds significant foreign exchange reserves, some of which are invested in US government bonds, but it is no longer accumulating them. China and Japan have significantly more money tied up in the American bond market than the Saudis.