Recently, rumors that Saudi Arabia has announced it will no longer renew the so-called "petrodollar agreement" with the United States and will cease using the US dollar for large-scale oil trade settlements have widely circulated on social media platforms both domestically and internationally. This has once again sparked discussions among various sectors regarding the dominant position of the US dollar in the international monetary system and has drawn increased attention to the future of the US dollar and the development direction of the international monetary system.

Overall, the "petrodollar agreement" between the US and Saudi Arabia may never have existed in the form of an official document. The term "petrodollar" is more of a concept constructed based on historical context and market psychology. This article, combining comments from international think tanks, scholars, and media, attempts to explore: How did the rumor of the "end of the petrodollar agreement" arise? Why has it gained relatively wide attention and dissemination? What is the future development trend of the US dollar and the international monetary system?

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The True and False "Petrodollar Agreement"

"Petrodollar" refers to oil export revenues denominated in US dollars. This term became popular in the mid-1970s when soaring oil prices brought huge trade totals and current account surpluses to oil-exporting countries, making petrodollars the main source of income for many OPEC members and other oil-exporting nations.

Investopedia further explains that "The petrodollar is neither a currency nor a global trade system. The widespread use of the US dollar for crude oil payments reflects the traditional preference of non-US oil suppliers."[1]

According to the latest data from Google Trends, the search volume for the term "petrodollar" surged dramatically within two weeks in early June of this year, reaching an all-time high[2], which to some extent reflects the public's concern about the status of the US dollar and attention to the trend of changes in the international monetary system.

It is worth noting that news about the "petrodollar" mainly circulated among some non-mainstream media both domestically and internationally. These media claim that "the 'petrodollar agreement' between the United States and Saudi Arabia expired on June 9, 2024, and Saudi Arabia will abandon the US dollar in favor of other currencies such as the Chinese yuan, the euro, and the Japanese yen for oil trade settlements. The agreement was originally signed on June 8, 1974, and is an important part of the global economic influence of the US dollar... This decision marks a significant shift in the petrodollar system and is expected to accelerate the global trend of using currencies other than the US dollar in international trade."[3]

There are many controversial aspects to the above statement, with the focus of the controversy being whether the United States and Saudi Arabia have ever officially signed such an official agreement. The majority opinion suggests that there has never been such a petroleum agreement between the US and Saudi Arabia, at least not officially signed. This point is further explored in David Wright's book "The Petrodollar," where he states that after reviewing a large number of declassified records and conducting in-depth research, he can conclude that the so-called petrodollar agreement does not exist.[4]

A commentary article from Bloomberg suggests that the driving force behind this false news includes cryptocurrency speculators, "gold bugs" (those who are extremely bullish on commodity gold), and various conspiracy theorists[5]. Paul Donovan, Chief Economist of UBS Global Wealth, calls this false news a "confirmation bias" of cryptocurrency speculators—many cryptocurrency speculators hope to see the decline of the US dollar and are eager to confirm their biases, resulting in the neglect of facts. "The story seems to have started in the crypto world, which is a poor investment strategy," Donovan said.[6]

Most comments interpret the rumored agreement as an economic and military agreement signed between the United States and Saudi Arabia on June 8, 1974, which led to the establishment of the US-Saudi Economic Cooperation Joint Committee. Although according to a report in The New York Times, the content of the agreement at the time did not directly mention oil[7] (both sides seemed to want to avoid giving the impression that this was a bilateral talk about oil), it gave rise to the origin of the news related to the "petrodollar agreement."Based on currently available information, 50 years ago the United States and Saudi Arabia reached an agreement to purchase U.S. Treasury bonds in the form of "recycling petrodollars" — in June of that year, the agreement stipulated that Saudi Arabia would use its excess dollars to purchase American products; in July of the same year, Saudi Arabia agreed to invest these dollars into U.S. Treasury bonds.

How to "recycle petrodollars" was a significant issue in the last century. An article by the International Monetary Fund (IMF) proposed that oil-exporting countries accumulated huge surpluses through the sale of oil, with Saudi Arabia, for example, having a current account surplus exceeding 50% of GDP in 1974. Due to their small population size or lower levels of industrialization, these oil-exporting countries often found it difficult to reinvest the surplus entirely into their domestic economies. If these funds were withdrawn from the market, it could have a negative impact on global economic growth. [8]

To address this challenge, the IMF introduced the "Oil Facility" from 1974 to 1976, aiming to help oil-importing countries facing shortages of funds, thereby resolving the imbalance of payments caused by rising oil prices. This tool allowed oil-exporting countries and other lenders to provide funds to the IMF, which in turn supported countries facing payment balance issues, especially those impacted by rising oil prices.

At the same time, OPEC member countries deposited part of their oil sales surpluses into foreign banks, which then lent the funds to governments of countries with payment deficits. These countries subsequently used the borrowed funds to purchase more oil and other imported goods, thus maintaining the continuity of economic activities.

However, recycling these dollar funds through the banking system, while somewhat alleviating the problem of global economic contraction, did not fundamentally solve the large-scale international payment imbalance dilemma. It actually led to a significant increase in the debt of oil-importing countries, especially developing ones. In just four years from 1973 to 1977, the foreign debt of 100 developing countries among oil importers surged by 150%. This debt accumulation not only intensified the economic pressure on oil-importing countries but also exposed structural problems within the global financial system, which needed to be addressed through deeper international cooperation and innovative financial mechanisms.

In 2016, Bloomberg revealed the details of the secret agreement between the United States and Saudi Arabia in July 1974 [9]. According to the agreement, the U.S. promised to purchase oil from Saudi Arabia and provide necessary military aid and equipment; in exchange, Saudi Arabia would use its huge dollar income from oil trade to buy U.S. Treasury bonds. This strategy constructed a "dollar-oil-U.S. Treasury bonds" closed-loop system, promoting the recycling of petrodollars back into the U.S. economy. However, this was not equivalent to a fixed mechanism for international oil trade to be priced and settled in dollars.

This recycling method bypassed banking intermediaries, directly creating a stable group of buyers for the U.S. Treasury bond market, thereby strengthening the international position of the dollar and naturally promoting the dollar's strength.

The role of "petro-dollars" may be diminishing.

Bloomberg financial commentator and writer Javier Blas believes that to this day, the concept of "petro-dollars" is nearing its end.

In his view, Saudi Arabia currently has no surplus funds available; on the contrary, the country is borrowing heavily in the sovereign debt market and funding its national economic plans by selling assets (including a majority stake in its national oil company). Moreover, the funding needs of OPEC countries themselves are also growing."In these senses, the influence of petrodollars may have begun to wane about thirty years ago, no longer exerting a significant impact on the global financial markets, even during the global oil price surge from 2003 to 2008, the value of the US dollar was also very limited." says Blas.

According to IMF data, Saudi Arabia's current account surplus, which peaked at 50% of GDP in 1974, will shrink to just 0.5% this year, and is expected to turn into a deficit as early as 2025, continuing to the end of this decade. This will be the first time since the oil price crash in 1986 that Saudi Arabia has a sustained current account deficit. Blas comments, "Without surplus oil funds available, there can be no petrodollars."

Although Blas believes that the role of petrodollars is diminishing, he does not think that petrodollars will disappear rapidly. "In my communications with various parties in the Middle East, I have found no signs that Saudi Arabia wishes to abandon the sale of oil priced in US dollars. The fact that the Saudi currency is pegged to the US dollar, and the ongoing agreements between the Saudi royal family and the White House aimed at strengthening bilateral relations, both mean that it is understandable for Saudi oil to continue to be priced in US dollars." In addition, Blas also mentioned that considering the limitations in terms of convertibility and liquidity, the drawbacks of Saudi oil switching to other currencies may outweigh the benefits.

The Abu Dhabi Commercial Bank, the third largest bank in the UAE, also anticipates that the so-called petrodollar will continue in the near and medium term. Its research team suggests that as part of the "Vision 2030" plan, Saudi Arabia needs hundreds of billions of dollars to transform its economy and move away from oil exports, a plan that relies on attracting substantial domestic and foreign investment, with some large-scale projects still requiring substantial funding. At a time when Saudi Arabia needs to increase foreign investment to support its transformation plan, pegging to the US dollar is crucial for foreign direct investment inflows and is beneficial for supporting the stability of Saudi Arabia's currency and macroeconomy.

The Atlantic Council, on the other hand, analyzes that in order to strengthen international relations with countries outside of Europe and America, Saudi Arabia may be inclined to use a more diversified range of currencies in its oil sales. Saudi Arabia's participation in the BRICS cooperation mechanism, as well as its cooperation with China, Thailand, the UAE, and other countries and regions on the mBridge cross-border central bank digital currency project, can also indicate that Saudi Arabia is gradually reducing its dependence on the US dollar. [11]

At the same time, the United States' dependence on Saudi oil has also been greatly reduced. Thanks to the shale gas revolution, the US is now the world's largest oil producer and a key net exporter of oil, with a significant reduction in the amount of oil imported from Saudi Arabia. According to relevant data, Asian countries are currently the main export market for Saudi crude oil and condensate, among which, China has become Saudi Arabia's largest oil customer and trade partner, accounting for more than 20% of Saudi Arabia's total exports.

"Saudi Arabia is willing to diversify the currencies in which it sells oil, which aligns with its more ambitious strategic vision. The influence of the United States has waned, and Beijing has established close trade-driven relations in the Middle East, and it must compete with the increasingly confident Beijing for influence, while also facing the push of Europe and other allies who wish to be more independent from Washington in financial and foreign policy issues." writes Hung Q. Tran, a senior fellow at the Atlantic Council, in his article.

Tran believes that as BRICS countries and regions such as the Middle East and Asia increasingly use their own currencies for cross-border payments, there is a growing perception that the influence of the US dollar in the global currency market and the international financial sector is diminishing, especially in terms of the use of petrodollars.

"De-dollarization" is becoming a trend.

The IMF publishes an article suggesting that due to strong US economic performance, tightening monetary policy, and increasing global geopolitical risks, the US dollar exchange rate has appreciated recently. At the same time, the global economy shows a trend of fragmentation, and the possibility of global economic and financial activities being reorganized into separate, non-overlapping blocs may encourage some countries to use and hold other international and reserve currencies. In this context, the dominant position of the US dollar has once again become a focus of attention.The IMF has indicated that while the US dollar remains the primary reserve currency, its share in the international foreign exchange reserve system has declined from 71% in 1999 to the current 58.4%, with its dominant position gradually being eroded by non-traditional currencies. The latest data from the IMF's Currency Composition of Official Foreign Exchange Reserves (COFER) database shows a slow decline in the share of the US dollar in the foreign exchange reserves of central banks and governments. However, contrary to expectations, the decrease in the US dollar has not been accompanied by a corresponding increase in the "four major" currencies (euro, yen, and pound sterling). Instead, there has been a rise in the share of "non-traditional reserve currencies," including the Australian dollar, Canadian dollar, renminbi, South Korean won, Singapore dollar, and Nordic currencies, among others.[12]

What makes non-traditional reserve currencies attractive? Scholars at the IMF believe that non-traditional reserve currencies offer opportunities for diversified investment and higher yields, and with the development of digital financial technologies such as automated market-making and automated liquidity management systems, non-traditional reserve currencies have become easier to buy, sell, and hold.[13]

Among the non-traditional reserve currencies that have seen an increase in market share, the proportion of the renminbi has increased by a quarter of the decrease in the proportion of the US dollar. However, the article suggests that the latest data does not show a further increase in the proportion of the renminbi in international reserve currencies. Some observers suspect that the depreciation of the renminbi exchange rate in recent quarters has masked an increase in renminbi reserves, but even after adjusting for exchange rate changes, the data shows that the proportion of the renminbi in international reserve currencies has stagnated since 2022.

Some individuals argue that the "continuous decline in US dollar holdings" and the "rise in the proportion of non-traditional currency reserves" mentioned in the IMF report merely reflect the behavior of a few large reserve holders, such as Russia's caution in holding US dollars from a geopolitical perspective and Switzerland's continuous increase in euro reserves over the past decade. However, overall, the diversification of foreign exchange reserves has indeed become a general trend, and even if the data from these two countries is excluded from the COFER aggregate data, the overall trend remains almost unchanged.

In a 2022 report, the IMF identified 46 "countries actively advancing reserve diversification," which are countries with a non-traditional currency foreign exchange reserve ratio of at least 5% by the end of 2020. These countries include not only major developed economies but also emerging economies, covering most members of the G20. Moreover, in 2023, at least three more countries—Israel, the Netherlands, and Seychelles—joined this list.[14]

As geopolitical risks increase, the demand for gold reserves by countries is also growing. Especially driven by the accumulation of gold by central banks in emerging economies, the holdings of gold in official reserve assets have approached the highest levels since World War II. The IMF has stated that financial sanctions in recent years have prompted central banks to shift their reserve investment portfolios slightly from currencies to gold—currencies face the risk of being frozen and redeployed, while gold can be stored domestically, thus avoiding the risk of sanctions.[15]

Furthermore, the practice of using local currencies for settlement in international trade and financial transactions is becoming more common. For example, the BRICS countries are actively promoting cooperation in local currency settlement. Article 44 of the "15th BRICS Leaders' Meeting Johannesburg Declaration" emphasizes the importance of encouraging BRICS countries and their trade partners to use local currencies in international trade and financial transactions; it encourages the strengthening of the correspondent banking network between BRICS countries to facilitate local currency settlement; and it instructs finance ministers and/or central bank governors to study BRICS local currency cooperation, payment tools, and platforms, with a report to be submitted before the next leaders' meeting. Similarly, during the 42nd ASEAN Summit in 2023, the ten ASEAN countries issued a joint declaration on promoting regional payment connectivity and facilitating local currency transactions. In August last year, the ASEAN Finance Ministers and Central Bank Governors Meeting approved the establishment of a local currency transaction framework within ASEAN.

The Atlantic Council analysis suggests that currently, using local currencies for settlement may bring efficiency costs because this process relies on local currencies with poor liquidity and hedging markets, which are less efficient than US dollar transactions. However, many of the aforementioned countries seem to have accepted the efficiency costs, considering it a necessary condition for reducing dependence on the US dollar.

Moreover, the advancement of digital transaction technologies, such as tokenization, will greatly reduce such costs. Specifically, tokenized units like Central Bank Digital Currencies (CBDCs) and stablecoins offer a new method of payment and settlement, reducing reliance on intermediaries such as commercial banks. This change has decreased the frequency of US dollar use in international transactions and reduced the necessity of holding US dollar reserves.Hippolyte Fofack, former Chief Economist at the African Export-Import Bank, stated that digitalization has facilitated the application of domestic currency settlements. For instance, central banks in Indonesia, Malaysia, Singapore, and Thailand have introduced digital cross-border payment systems based on QR codes, allowing residents to make payments without using carrier currencies such as the US dollar. This helps to bypass financial restrictions associated with the US dollar and enhances the resilience of the financial system.[16]

In summary, with the rise of non-traditional currencies and the development of digital transaction technologies, the gradual weakening of the US dollar's role may become a trend, and the international monetary system is undergoing slow but profound changes.