【MACRO Insight】The end of the Petrodollar Agreement — Transition in Global Financial Order and Multi-Currency Oil Sales!

Saudi Arabia's 50-year Petrodollar Agreement with the United States has expired, and Saudi Arabia has chosen not to renew it, signaling a transition in the global financial order towards an unknown new model. Saudi Arabia now has greater flexibility to sell oil in multiple currencies, including the Chinese yuan, euro, and Japanese yen, with potential expansion to other currencies in the future.

This change may reflect broader economic strategies by the Saudi government to reduce dependence on the dollar and could potentially catalyze significant shifts in global financial markets. However, some analysts argue that external assessments of the agreement's impact on the dollar's status may be overstated. Nevertheless, Saudi Arabia's financial strategies could open doors for a more multipolar currency system in the global financial landscape.

The Petrodollar Agreement began in 1974 when Saudi Arabia agreed to price its oil exports in dollars and invest in US Treasury securities in exchange for US military support. This not only solidified the dollar's status as the world's reserve currency but also ushered in a prosperous era for the United States. However, with the evolution of the global economy, changes in oil demand, and escalating geopolitical tensions, the transformation of Western currencies is accelerating.

Saudi Arabia is actively exploring digital currency avenues and has joined the mBridge initiative led by the Bank for International Settlements to explore platforms for central bank digital currencies (CBDCs), aiming to facilitate instant cross-border payments and foreign exchange transactions. Meanwhile, Saudi Arabia is also seeking to move beyond exclusive ties with the United States by becoming one of the newest members of the BRICS group, indicating its pursuit of diversified international cooperation.

While many analysts believe that the threat to the dollar's reserve currency status has been exaggerated, the expiration of the Petrodollar Agreement could potentially weaken the dollar in the long term, thereby impacting the US financial markets. A decrease in global demand for the dollar could lead to increased US inflation, higher interest rates, and a softening bond market.

The United States is also seeking to negotiate a new agreement with Saudi Arabia to maintain their strong relationship. Reports indicate that the Biden administration is close to finalizing a treaty with Saudi Arabia, committing to assist in defending Saudi Arabia as part of encouraging Saudi-Israeli diplomatic relations. Additionally, US and other officials are pushing for broader initiatives, including a US-Saudi civilian nuclear agreement, steps towards establishing a Palestinian state, and ending the Gaza conflict.

Interesting is the International Energy Agency (IEA) prediction in its “2024 Oil Report” that global oil demand growth will slow with the transition to clean energy, projecting a peak around 2029. OPEC Secretary General Haitham Al Ghais opposes IEAs forecast of a peak in oil demand before 2030, citing historical inaccuracies in their past predictions and emphasizing ongoing energy demand growth, particularly in developing countries. He also suggests that such statements could lead to market volatility, criticizing IEA for maintaining an anti-oil stance in its predictions.

There is skepticism among experts in the academic community regarding peak oil demand forecasts due to the numerous assumptions involved, any of which could alter model outcomes. Professor Morgan Bazilian goes as far as to suggest that even if oil demand peaks, it may not sharply decline but rather undergo a gradual decrease.

However, the termination of the Petrodollar Agreement marks a significant shift in global power dynamics, highlighting changes in the energy landscape and the increasing influence of emerging economies. While the current status of the dollar as the oil standard remains effective for now, this shift signals further economic and geopolitical differentiation in the future, opening doors for alternative assets.

As Saudi assets potentially diversify more into gold or Bitcoin, it could contribute to pushing up the prices of these assets, depending on the extent of diversification. Simultaneously, BRICS countries are working towards establishing an independent payment system immune to political pressure, abuse, and external sanctions, which could be beneficial for the price of gold.