Would it be a big deal if Saudi Arabia joined the BRICS alliance?
It could mean the end of the petrodollar.
In 1971, President Nixon took the dollar off the gold standard. Prior to that, nations could exchange the dollars they held for gold at $35 /oz.
This ended the 1944 Bretton Woods agreement, and launched a new global order known as the petrodollar.
In the early 1970s, the US was in debt from Vietnam and the Great Society social program.
Unlike World War II or the Korean War, Vietnam was the first American war funded almost entirely with credit.
In 1973, the middle eastern OPEC nations increased the price of oil 4x in response to US support for Israel during the Yom Kippur War.
This pushed the US to negotiate an arrangement with Saudi Arabia to buy oil using dollars.
The deal was simple: the U.S. would buy oil from Saudi Arabia and provide the kingdom military aid and equipment.
In return, the Saudis would send billions of petrodollar revenue back into US Treasuries (bonds) and finance US growth & government spending.
Industrializing nations also need oil, and to get it, they now had to either export goods to the United States (to earn dollars), or buy dollars in foreign exchange markets.
Both options increased the demand for the US dollar (higher demand = higher value).
Ultimately, U.S. treasuries replaced gold as the world’s reserve currency and ultimate store of value.
This drove the price of the dollar up, which was great for oil producers storing profit in dollars.
But it made oil very expensive for emerging nations with weaker currencies.
It also made US exports very expensive overseas which is why US manufacturing declined steadily since the 1970s.
This hurt Americans who worked in blue collar industries as their jobs were eliminated.
Pressure on other nations to support US foreign policy is also part of the petrodollar system. Any leader who attempted to buy or sell oil in another currency met with harsh consequences.
Both Saddam Hussein and Muammar Gaddafi aspired to sell oil outside the petrodollar system before facing retaliation from the US.
Why would Saudi Arabia consider joining BRICS?
One challenge for wealthy oil producers who have been holding their wealth in dollars is inflation.
Decades of new money has been added to the supply, especially over the past two years, which has caused the dollar to lose value.
If Saudi Arabia were to align with the BRICS nations, and sell oil in another currency, would this effectively end the petrodollar agreement? Maybe.
What would that mean for the US dollar?
We can only speculate, but it would likely have a significant impact on the role of the US in global commerce, and the value of the dollar.
One response to “What is the Petrodollar?”
[…] In the mid-1970s, the US government made an agreement with the middle eastern OPEC nations to only sell oil using US Dollars. This is called the Petrodollar agreement. […]