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The US dollar’s dominance is in decline as Russia and Saudi Arabia eye the Chinese yuan for oil trades, and investors may need to begin to revise their long-term investment strategies, warns the CEO and founder of one of the world’s largest independent financial advisory and asset management companies, deVere Group.
The warning from Nigel Green says the shift in how global oil trading is carried out will have far-reaching consequences for economies and, therefore, investors around the world.
“One of the most significant but under-reported outcomes of April’s three-day summit between Russia’s Vladimir Putin and China’s Xi Jinping was that Putin said Russia is now in favour of using the Chinese yuan for oil settlements," said Green. This suggests that the world’s second-largest economy and the world’s largest energy exporter are actively intending to reduce the dominance of the US dollar as the bedrock of the international financial system.
“Separately, two deals... would see Saudi Arabia’s Aramco supplying two Chinese companies with a combined 690,000 barrels a day of crude oil, bolstering its rank as China's top provider of the commodity," added Green. "It has been reported that Saudi Arabia is also in talks with Beijing to settle with the yuan instead of the dollar."
Aramco is one of the largest oil producers in the world and is fully owned and controlled by the Saudi Arabian government.
It appears US rivals, led by China, are forming a new major economic bloc. If Saudi Arabia – home to massive oil reserves, which are estimated to be the largest in the world – does move to the yuan that would lead to an enormous shift in the global economic system.
“Oil is one of the most important and widely traded commodities in the world, and it has traditionally been priced and traded in US dollars," said Green. "This has given the US dollar a dominant role in global financial markets as countries that want to purchase oil must first acquire US dollars in order to do so."
If oil trading were to shift away from the US dollar it would dramatically reduce the demand for US dollars, which would lead to a decrease in the value of the US currency.
"This could have a number of ripple effects throughout the global economy, including hugely increased inflation in the US and potentially destabilising effects on financial markets," said Green.
Additionally, a shift away from the US dollar in oil trading could lead to greater economic and geopolitical competition between countries. If the yuan were to become more widely used in oil trading, this could significantly increase the economic power and influence of China, challenging the dominance of the US in major global affairs.
These shifts are not just theoretical, they are “beginning to happen in real time”, said Green, meaning investors may need to begin to revise their portfolios.
“If oil were priced and traded in a different currency, investors would be exposed to currency risk as the value of the currency could impact the value of their investments," he added. "They would need to consider the potential impact of currency fluctuations on their portfolio and may need to adjust their holdings accordingly.”
There are also industry-specific risks. “Companies that generate significant revenue from oil production or related services would be impacted by changes in the currency used for trading," said Green. "Investors with exposure to these types of companies would need to evaluate the potential impact of a shift away from the dollar on their investments.”
Oil is a critical input for many industries, and changes in the price of it can have enormous, far-reaching implications for the global economy. If oil were no longer traded in US dollars, it would impact the global financial system and would have ripple effects throughout the world economy.
“Investors who are serious about building their wealth for the long term need to be alive to the impact of the dollar’s decline, not in the future but now," concluded Green.
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Saudi Arabia Ditches US Dollar, Will Not Be Renewing The 50-Year Petrodollar Agreement With The United States.
The recent decision by Saudi Arabia to not renew its decades-long petrodollar agreement with the United States marks a significant shift in global financial dynamics. Here are the key points and implications of this development:
End of Petrodollar Agreement: The petrodollar agreement, which has been in place for around 50 years, allowed the United States to secure oil from Saudi Arabia in exchange for military support and cooperation. The agreement has now lapsed as Saudi Arabia chose not to renew it.
Impact on US-Saudi Relations: This decision puts strain on the trade relationship between Saudi Arabia and the United States. Historically, the petrodollar system ensured stability and economic benefits for both nations, but Saudi Arabia's move signals a shift away from US dollar dependency.
De-Dollarization Agenda: Saudi Arabia's decision is seen as a significant step towards the global de-dollarization agenda. By opting to trade oil in multiple currencies including the Renminbi, Euros, Yen, and Yuan, Saudi Arabia is diversifying its currency reserves and reducing reliance on the US dollar.
Multipolar Currency System: Embracing a multipolar currency system aligns with broader global trends promoted by alliances such as BRICS (Brazil, Russia, India, China, South Africa) and ASEAN (Association of Southeast Asian Nations). These groups have advocated for reducing dependency on the US dollar and promoting alternative currencies.
Financial Market Reactions: The financial world is now bracing for the impact of Saudi Arabia's decision. It could lead to increased volatility in currency markets, particularly affecting the value and stability of the US dollar against other major currencies.
Geopolitical Implications: Geopolitically, Saudi Arabia's shift may alter alliances and geopolitical strategies globally. It could lead to closer economic ties with countries whose currencies are included in Saudi Arabia's new oil trading arrangements.
In summary, Saudi Arabia's move away from the petrodollar agreement with the US signifies a broader trend towards de-dollarization and the adoption of multipolar currency systems. This decision is likely to have profound implications for global financial markets, geopolitical relationships, and the role of the US dollar in international trade and finance.
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The Petrodollar System's Demise?
A collapse of a longstanding 'petrodollar' agreement between the U.S. and Saudi Arabia spread like wildfire on social media.
It was big news, and many wondered why the mainstream media had ignored it.
Earlier this week, reports circulating widely on social-media platforms like X offered up the shocking proclamation: A 50-year-old agreement between the U.S. and Saudi Arabia requiring that the latter price its crude-oil exports in U.S. dollars had expired on Sunday.
The collapse of the accord would inevitably deal a fatal blow to the U.S. dollar's status as the de facto global reserve currency, various commentators on X opined. Surely, financial upheaval must lay ahead.
Almost immediately, Google searches for the term "petrodollar" spiked to the highest level on record dating back to 2004, according to Google Trends data.
But as speculation about an imminent end to the U.S. dollar's global dominance intensified, several Wall Street and foreign-policy experts emerged to point out the agreement itself existed; but not a the way it was being described.
In a blog post published Friday, Paul Donovan, chief economist at UBS Global Wealth Management, remarked that there was an agreement signed in June of 1974, but it didn't involve currencies at the time because the Saudis carried on selling in sterling after that, only later, Donovan noted in an interview with MarketWatch.
The agreement referred to by Donovan is the United States-Saudi Arabian Joint Commission on Economic Cooperation. Was formally established on June 8, 1974, by a joint statement issued and signed by Henry Kissinger, the U.S. secretary of state at the time, and Prince Fahd, the second deputy prime minister (and later king and prime minister) of Saudi Arabia, according to a report found on the Government Accountability Office's website.
The agreement, as initially envisioned, was intended to last five years, although it was repeatedly extended. The rational for such a deal was pretty straightforward: Coming on the heels of the 1973 OPEC oil embargo, both the U.S. and Saudi Arabia were eager to flesh out a more formal arrangement that would ensure each side got more of what it wanted from the other.
The surge in oil prices following the OPEC embargo was leaving Saudi Arabia with a surplus of dollars, and the Kingdom's leadership was eager to harness this wealth to further industrialize its economy beyond the oil sector. At the same time, the U.S. wanted to strengthen its then-nascent diplomatic relationship with Saudi Arabia, while encouraging the country to recycle its dollars back into the U.S. economy.
Washington also wanted to ensure there wouldn't be a repeat of the 1973 embargo, which sparked a destabilizing wave of inflation and an economic and stock-market crash.
According to Donovan and others, a formal agreement demanding that Saudi Arabia price its crude oil in dollars hadn't started yet. Rather, Saudi Arabia continued accepting other currencies - most notably the British pound (GBPUSD) - for its oil even after the 1974 agreement on joint economic cooperation was struck. It wasn't until later that year that the Kingdom stopped accepting the pound as payment.
The petrodollar deal began as a secret agreement between the U.S. and Saudi Arabia reached in late 1974, which promised military aid and equipment in exchange for the Kingdom investing billions of dollars of its oil-sales proceeds in U.S. Treasury's, Donovan said. The existence of this agreement wasn't revealed until 2016, when Bloomberg News filed a Freedom of Information Act request with the National Archives.
Bloomberg's reporting also led to the Treasury Department breaking out figures on Saudi Treasury ownership for the first time, revealing that the Kingdom was among the largest creditors to the U.S. - although Bloomberg's sources reportedly said the official figures likely underestimated the Kingdom's total dollar reserves.
Still, the notion is that the petrodollar system largely grew organically from a place of mutual benefit according to Gregory Brew, an analyst at Eurasia Group.
Brew told MarketWatch in an interview on Friday. "There is a very clear record of both the Americans and the Saudis being concerned in the aftermath of the global oil shock of what Saudi surpluses would do to the global economy."
"It was a very common-sense solution to a mutual problem," he added.
To be sure, there have been some signs recently that the Saudis are more open to accepting currencies other than the dollar as payment for some of their oil sales. The Wall Street Journal has reported that the Saudis have been in talks with Beijing for years about accepting payment in yuan (USDCNY), for example.
What matters most when it comes to the dollar maintaining its role as the world's main reserve currency is where oil exporters like Saudi Arabia decide to park their reserves, Donovan said.
"Ultimately, the more important question is does Saudi Arabia change the currency in which it holds its reserves, which at the moment is majority dollar," Donovan said.
The latest data from the International Monetary Fund show that while the dollar's share of global reserves has continued to gradually decline, no rival is garnering a large enough share to challenge the dollar's dominance. Instead, central banks have continued to diversify their holdings into a range of other "nontraditional" reserve currencies like Australian (AUDUSD) and Canadian (USDCAD) dollars and Chinese yuan.
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Saudi Arabia Joins BIS- And China-Led Central Bank Digital Currency Project
Saudi Arabia has joined a China-dominated central bank digital currency cross-border trial, in what could be another step towards less of the world's oil trade being done in U.S. dollars.
The move, announced by the Bank for International Settlements on Wednesday, will see Saudi's central bank become a "full participant" of Project mBridge, a collaboration launched in 2021 between the central banks of China, Hong Kong, Thailand and the United Arab Emirates.
The BIS, a global central bank umbrella organisation which oversees the project, also announced that mBridge had reached "minimum viable product" stage, meaning it will move beyond the pro type phase.
Roughly 135 countries and currency unions, representing 98% of global GDP, are exploring central bank digital currencies, or CBDCs. But the new technologies they use makes cross-border movement both technically challenging and politically sensitive.
"The most advanced cross-border CBDC project just added a major G20 economy and the largest oil exporter in the world," said Josh Lipsky, who runs a global CBDC tracker, opens new tab at the U.S.-based Atlantic Council.
"This means in the coming year you can expect to see a scaling up of commodity settlement on the platform outside of dollars – something that was already underway between China and Saudi Arabia but now has new technology behind it."
The mBridge transactions can use the code China's e-yuan is built on. That code is also available to the project's 26 other "observing members" that include the likes of the New York branch of the Federal Reserve, the International Monetary Fund and European Central Bank.
The BIS also said the mBridge platform was now compatible with the Ethereum Virtual Machine - a piece of software that forms the backbone of the network used by the Ether cryptocurrency.
"This allows it to be a testbed," it said.
Supporters of CBDCs say they will modernise payments with new functionality and provide an alternative to physical cash, which seems in terminal decline.
But questions remain why they represent an advance, with barely any uptake in countries such as Nigeria that have already adopted them, and both political and public pushback in some countries amid fears they could enable government snooping.
As well as dominating the mBridge project, China is carrying out the world's largest domestic CBDC pilot which now reaches 260 million people and covers 200 scenarios from e-commerce to government stimulus payments.
Other big emerging economies, including India, Brazil and Russia, also plan to launch digital currencies in the next 1-2 years while the ECB has begun work on a digital euro pilot ahead of a possible launch in 2028.
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Is The Collapse Of The Petrodollar Imminent? Here’s How It Could Impact The World’s Reserve Currency
It’s been rightly said that “he who holds the gold makes the rules.”
After World War 2, the US had the largest gold reserves in the world, by far. Along with winning the war, this let the US reconstruct the global monetary system around the dollar.
The new system, created at the Bretton Woods Conference in 1944, tied the currencies of virtually every country in the world to the US dollar through a fixed exchange rate. It also tied the US dollar to gold at a fixed rate of $35 per ounce.
The dollar was said to be “as good as gold.”
The Bretton Woods system made the US dollar the world’s premier reserve currency. It compelled other countries to store dollars for international trade or to exchange them with the US government for gold at the promised price.
However, it was doomed to fail.
Runaway spending on warfare and welfare caused the US government to print more dollars than it could back with gold at the promised price.
By 1967, the number of dollars circulating had drastically increased relative to the amount of gold backing them. This encouraged foreign countries to exchange their dollars for gold, draining the US gold supply at an alarming rate and collapsing the London Gold Pool. At this point, it was clear this system was breaking down.
On Sunday night, August 15, 1971, President Nixon interrupted the scheduled TV programs and made a surprise announcement to the nation—and the world. He announced the unilateral end of the Bretton Woods system and severed the dollar’s last tie to gold.
The end of the dollar’s gold backing had profound geopolitical consequences.
Most critically, it eliminated the main reason foreign countries stored large amounts of US dollars and used the US dollar for international trade. As a result, oil-producing countries began to demand payment in gold instead of rapidly depreciating dollars.
It was clear the US would have to create a new monetary system to stabilize the dollar. So it concocted a new scheme… and chose Saudi Arabia as its accomplice. This agreement came to be known as the “petrodollar system.”
The US handpicked Saudi Arabia because of its vast petroleum reserves and dominant position in the global oil market.
In essence, the petrodollar system was an agreement that the US would guarantee the House of Saud’s survival. In exchange, Saudi Arabia would do three things.
First, it would use its dominant position in OPEC to ensure that all oil transactions would only happen in US dollars.
Second, it would recycle hundreds of billions of US dollars from annual oil revenue into US Treasuries. This lets the US issue more debt and finance previously unimaginable budget deficits.
Third, it would guarantee the price of oil within limits acceptable to the US and prevent another oil embargo.
The petrodollar system gave foreign countries another compelling reason to hold and use the dollar. And it preserved the dollar’s unique status as the world’s top reserve currency.
But… why oil?
Oil is the largest and most strategic commodity market in the world.
Every country needs oil. And if foreign countries need US dollars to buy oil, they have a compelling reason to hold US dollars even if they are not backed by a promise to redeem them in gold.
Think about it… If France wants to buy oil from Saudi Arabia, it must purchase US dollars on the foreign exchange market to pay for the oil first.
This creates a huge artificial market for US dollars and differentiates the US dollar from a purely local currency, like the Mexican peso.
The dollar is just a middleman. It’s used in countless transactions, amounting to trillions of dollars that have nothing to do with US products or services.
Since the oil market is enormous, it acts as a benchmark for international trade. If foreign countries are already using dollars for oil, it’s easier to use the dollar for other international trade.
In addition to nearly all oil sales, the US dollar is used for about 80% of all international transactions.
Ultimately, the petrodollar boosts the US dollar’s purchasing power by enticing foreigners to soak up dollars.
The petrodollar system has helped create a deeper, more liquid market for the dollar and US Treasuries. It has also helped the US keep interest rates lower than they would otherwise be, allowing the US government to finance enormous deficits it otherwise would be unable to.
Multi-trillion deficits would otherwise be impossible without destroying the currency through money printing.
It’s hard to overstate how much the petrodollar system benefits the US. It’s the bedrock of the US financial system and has underpinned the dollar’s role as the world’s reserve currency since the 1970s.
That’s why the US government protects it so fiercely. It needs the system to survive.
World leaders who have challenged the petrodollar have ended up dead.
Take Saddam Hussein and Muammar Gaddafi, for example. Each led a large oil-producing country—Iraq and Libya, respectively. And both tried to sell their oil for something other than US dollars before US military interventions led to their deaths.
Of course, there were other reasons the US toppled Saddam and Gaddafi. But protecting the petrodollar was a serious consideration, at the very least.
When countries like Iraq and Libya challenge the petrodollar system, it’s one thing. The US military can dispatch them with ease.
However, it’s a whole other dynamic when China (and Russia) undermine the petrodollar system… which is happening in a big way right now.
China and Russia are the only countries with sophisticated enough nuclear arsenals to go toe-to-toe with the US up to the top of the military escalation ladder.
In other words, the US military can’t attack Russia and China with impunity because they can match each move up to all-out nuclear war—the very top of the military escalation ladder.
For this reason, the US is deterred from entering a direct military conflict with China and Russia—even though they are about to strike a fatal blow to the petrodollar system.
US Sanctions Accelerate Demise of Petrodollar
In the wake of Russia’s invasion of Ukraine, the US government launched its most aggressive sanctions campaign ever.
Exceeding even Iran and North Korea, Russia is now the most sanctioned nation in the world.
“This is financial nuclear war and the largest sanctions event in history,” said a former US Treasury Department official.
He said, “Russia went from being part of the global economy to the single largest target of global sanctions and a financial pariah in less than two weeks.”
As part of this, the US government seized the US dollar reserves of the Russian central bank—the accumulated savings of the nation. (Washington did the same to Afghanistan’s dollar reserves after the Taliban took Kabul.)
It was a stunning illustration of the dollar’s political risk. The US government can seize another sovereign country’s dollar reserves at the flip of a switch.
The Wall Street Journal, in an article titled “If Russian Currency Reserves Aren’t Really Money, the World Is in for a Shock,” noted:
“Sanctions have shown that currency reserves accumulated by central banks can be taken away. With China taking note, this may reshape geopolitics, economic management and even the international role of the U.S. dollar.”
The head of the Russian Parliament recently called the US dollar a “candy wrapper” but not the candy itself. In other words, the dollar has the outward appearance of money but is not real money.
It’s important to remember some simple facts.
#1: Russia is the world’s largest energy producer.
#2: China is the world’s largest energy importer.
#3: Russia is China’s largest oil supplier.
And now that the US has banned Russia from the dollar system, there is an urgent need for a credible system capable of handling hundreds of billions worth of oil sales outside the US dollar and financial system.
The Shanghai International Energy Exchange (INE) is that system. The maturation of China’s alternative to the petrodollar is a big reason why the massive amount of energy trade between Russia and China occurs in yuan, not US dollars.
Further, Washington has threatened to sanction China similarly for years.
These threats against China may be a bluff, but if the US government carried them out—as it recently did against Russia—it would be like dropping a financial nuclear bomb on Beijing. Without access to dollars, China would have previously struggled to import oil and engage in international trade. As a result, its economy would come to a grinding halt, an intolerable threat to the stability of the Chinese government.
China would rather not depend on an adversary like this. It’s one of the main reasons it created an alternative to the petrodollar system. The INE allows oil producers to sell their products for yuan (and gold indirectly) while bypassing the US dollar, sanctions, and financial system.
Other countries on Washington’s sanctions list are enthusiastically signing up.
According to Credit Suisse, Russia, Iran, and Venezuela own 40% of the proven oil reserves of OPEC+ members. These countries are under strict US sanctions, which makes accepting US dollars and transacting globally challenging. So it’s no surprise that these sanctioned oil producers are happy to accept yuan as payment and support the petroyuan system.
But it’s not just sanctioned oil producers that benefit from the petroyuan…
Think about it. Any oil-producing country has two choices:
Option #1 – The Petrodollar
The dismal financial situation of the US guarantees the dollar will lose significant purchasing power.
Plus, there’s enormous political risk. Oil producers are exposed to the whims of the US government, which can confiscate their money whenever it wants, as it recently did to Russia.
Option #2 – Shanghai International Energy Exchange
Here, an oil producer can participate in the world’s largest market and try to capture more market share.
It can also easily convert and repatriate its proceeds into physical gold, an international form of money with no political or counterparty risk.
From the perspective of an oil producer, the choice is a no-brainer.
Even though most people have not realized it yet, we are at the end of the petrodollar system and on the cusp of a new monetary era.
There’s an excellent chance more financial turmoil is coming soon.
Are you ready for it?
As you can see in the chart below, oil dwarfs all other major commodity markets combined. The annual production value of the oil market is ten times bigger than the gold market, for example.
