What the expiry of US-Saudi petrodollar pact means

The matter has sparked heated debate across the world, with some respected American experts pointing out that there never was an agreement to that effect.

Whether it existed or not, the fact is that at a time when shortage of the dollar was making life difficult in Tanzania, oil importers are of the view that an end to the petrodollar agreement could potentially result in a decrease in global dollar demand and subsequent reduction in fuel prices.

"Saudi Arabia is one of the top three oil producers globally, alongside Russia and the US. If they choose to sell oil in another currency, it will still be beneficial for us because fuel prices will drop as the dollar's value decreases,” said Tanzania Association of Oil Marketing Companies (Taomac) executive director Raphael Mgaya.

Tanzania normally imports fuel on a monthly basis averaging $250 million through competitive tender from various countries.

"The fuel is imported through refineries from Middle East Countries including Saudi Arabia, Singapore and India which have crude oil," Mr Mgaya said.

According to him, most local importers purchase from Middle East Countries and Singapore because they are closer to Tanzania than Venezuela whose cost of transportation is high.

However, he noted that they don't have the exact figure for Saudi Arabia because every tender at state country of origin is different.

The dollar availability challenge has persisted to the extent that importers, especially those of petroleum products, were increasingly adopting the euro.

However, the adoption is not without a cost as the euro remains an expensive option and with the dollar remaining the preferred vehicle currency, the international conversion rate still recognises it (the dollar).

Traders say they started adopting the euro after realising that it has been stable for a long time and that it is widely accepted.

Available data show that forex required for products to be sold in June, 2024 includes $86.7 million and 43.8 million euros from the official market, excluding dollars from the black market.

 “More than a third of the petroleum products imported in June were imported using the euro. This is also partly affecting fuel prices in the country,” Mr Mgaya said recently.

The Energy and Water Utilities Regulatory Authority (Ewura) said earlier this month that though global prices of petroleum products were going down, the impact in the local market was minimal due to the continuous use of the euro.

“Moreover, the changes in petroleum prices are attributed to the change in the exchange rate and a continuous use of the euro for the payment of imported petroleum products,” Ewura director general James Mwainyekule, said while announcing the cap prices for petroleum prices in Tanzania earlier this month.

The Bank of Tanzania (BoT) says that while the business community is slowly turning to the euro and other currencies, it remains expensive because the dollar is still recognized by the international conversion rate.

In early 2023, the government confirmed that the country was facing a dollar shortage, a crisis that has been affecting several nations in Africa.

Historical agreement

The original petrodollar agreement was signed on 8th June 1974 by US Secretary of State Henry Kissinger and Prince Fand Ibn Abdel Aziz of Saudi Arabia.

It was a period marked by the aftermath of the Arab oil embargo and a notable spike in international oil prices. The agreement, which was later known as the petrodollar system, was aimed to establish a stabilised global oil market and ensure a steady flow of oil from Saudi Arabia to the United States. In return, the United States agreed to help Saudi Arabia with military enhancements and economic cooperation.

Under the agreement, Saudi Arabia agreed to price its oil exports exclusively in U.S. dollars and invest its surplus oil revenues in US Treasury bonds, and it was promised US military, security, and economic development assistance in return.

 This system replaced gold as the standard of value which enabled the US to maintain dominance over international trade and allowed the US government to control the world’s energy market. Although the agreement was signed by the Saudi government, almost all OPEC countries use the US Dollar to sell their oil in the international market.

When the pact was signed, The New York Times reported it as a “milestone pact” and highlighted its role in fostering closer economic ties between the two nations. The report pointed out that it would stabilize the oil market. The U.S.-Saudi Arabian Joint Commission on Economic Cooperation, as detailed in a report by the Comptroller General of the United States, was a central element of this agreement.

This particular commission has the aim to foster closer political and economic ties between the two nations. Not to forget, the US allies were also dependent on Saudi oil. It facilitated the flow of goods, services, and technology from the US to Saudi Arabia in exchange for Saudi oil sold exclusively in US dollars. This arrangement not only secured the US’s energy needs but also reinforced the dollar’s position as the dominant global currency.

The agreement ensured that Saudi Arabia would reinvest its oil revenues in US assets. It further tied the economic fortunes of the two nations together and enhanced US economic influence worldwide.

A paradigm shift in global finance

As Saudi Arabia has decided not to renew the petrodollar agreement, the country now has the flexibility to conduct sales of its largest asset in multiple currencies.

It includes the Chinese RMB, Euros, Yen, and Yuan, which will expand in the future. It reflects a broader strategy of the Middle Eastern country to diversify its economic alliances and reduce reliance on the US dollar.

This move can be seen as a potential catalyst for a significant shift in the global financial markets as it will push the countries to shift away from the US dollar as the primary reserve currency.

So far, the US dollar has served as the base for determining the value of different international currencies which would now change in coming years.

Katja Hamilton of BizCommunity highlights that this shift could pave the way for new global economic transactions, potentially diminishing the US dollar's role as the primary reserve currency.

In July 2023, it was reported that banks in 22 countries including Russia, the UK, Germany, Israel, and others opened special Vostro accounts in Indian banks to trade in Indian rupee.

Saudi Arabia's shift away from the dollar could encourage other oil countries, including India, to follow suit.