There is a legend that in 1973, US president Richard Nixon and secretary of state Henry Kissinger made a secret deal with Saudi Arabia to price oil exclusively in dollars, thus pegging the currency to oil and birthing the petrodollar.
According to the myth, the US provides military protection for Saudi Arabia’s oil fields in exchange for the kingdom’s role in enforcing US dollar hegemony over the world’s most valuable commodity market. Supposedly, the country’s sovereigns signed a 50-year petrodollar pact on June 6, 1974, which expired on or around June 9, 2024.
If that were true, this week would be one of the most historic weeks in the history of the US dollar. It should be primed for an immediate crash, according to the theory, to the immediate benefit of emerging currencies.
Some articles go so far as to claim, “Crown Prince Mohammed bin Salman has informed the Saudi government that the country will no longer accept US dollars for oil transactions.” Yes, there are people who actually believe that, with many posting that Saudi Arabia was somehow dedollarizing as we speak.
Moreover, believers in this ostensible expiry even claim that it would benefit Ripple’s technology or Central Bank Digital Currencies (CBDCs). Indeed, members of the XRP Army posted vague claims that the event would catalyze an agreement by the Saudi central bank to use Ripple for oil payments or a transnational BRICS stablecoin.
Read more: Crypto Twitter misinterpreted everything in SEC v. Ripple
Crypto believed in Saudi Arabia’s oil-for-dollars pact
Of course, the reality is that almost all oil trade has been and will be priced in US dollars (or dollar-settled US treasury equivalents) for many years to come. This is not because the kingdom signed an ancient document but simply because the US dollar is the world’s most liquid currency.
There is a reason that a dominant 58% of disclosed foreign reserves in 2022 were US dollars — dwarfing the euro’s 21%, Japanese yen’s 6%, or China’s 3%. According to the world’s largest bank wire system, SWIFT, 47.3% of global payments currency used US dollars as of April 2024 — dwarfing the euro’s 22.5%, UK pound’s 6.8%, and China’s 4.5%.
Lest there be any doubt, 84% of global trade finance market transactions — measured by SWIFT as ‘Advice of Payment’ (MT 400) or ‘Issue of a Documentary Credit’ (MT 700) deliveries in April 2024 — denominated in USD.
Likewise, Saudi Arabia has been selling some oil for non-dollar assets for many years. It has sold a small amount of its oil for Chinese yuan, Russian rubles, gold, and a variety of other assets.
Likewise, US military protection is available, provided it benefits US foreign policy interests. The US military serves at the pleasure of the US commander-in-chief. As evidenced by the US military’s disastrous occupation and withdrawal from Afghani oil fields — an “unmitigated disaster of epic proportions” according to the US House Foreign Affairs Committee — US diplomacy over foreign oil fields shifts quickly.
Indeed, the public has never seen a signed 50-year petrodollar pact. The countries probably never signed one.
Saudi Arabia acted in its best interest
Instead of a signed agreement, Saudi Arabia sold its oil mostly for dollars over the years simply because most of the world wants dollars. Benefiting from a persistent bid for US dollars for decades, it was maximally profitable for the kingdom to consistently sell oil to dollar-denominating bidders.
Similarly, the US military has protected Saudi oil fields over the years, not because it reluctantly adhered to terms of an ancient pact, but because the US has an interest in protecting its oil interests and encouraging purchases of US treasuries. US treasuries fund the US government and military.
Saudi Arabia produces approximately 9 million barrels of oil per day. The country’s GDP-to-debt is less than 30% — far healthier than the 100% ratio it held 34 years ago when it took loans to survive a late-1980s crash in oil prices. It has flexibility to sell its oil to bidders in various currencies and will continue to evaluate the profitability and diplomatic implications of accepting non-USD payment.
For the past decade, the kingdom has run a small fiscal deficit every year and expects to continue deficit spending for another five years. It spends lavishly on real estate, including planned megalopolises like Neom, a linear city that initially boasted a price tag exceeding $1 trillion.
The kingdom’s deficit this year will be approximately 2.8% of its GDP. (For context, the US ran a 6.3% deficit to its much larger GDP last year.) In short, it has plenty of fiscal flexibility to make decisions about its oil counterparties.
The Mandela-effected ‘pact’
Of course, even though June 9, 2024 has passed, the Kingdom of Saudi Arabia will obviously continue to sell most of its oil for dollars. Likewise, the US military will probably continue to protect Saudi oil fields. No, a 50-year petrodollar pact didn’t renew to cause this mutually beneficial cooperation. Instead, the countries will continue to cooperate as long as both sovereigns believe it makes sense to cooperate.
People have speculated about oil-producing countries breaking ties with the dollar since the 1970s. People want to believe the end of dollar hegemony is nigh. It’s not.
Similarly, there is no reason for Saudi Arabia to suddenly adopt Ripple’s technology or any CBDC because of the expiration of a non-existent 50-year pact.
Several members of the crypto community believe it exists because of the Mandela Effect, a well-known cognitive phenomenon wherein large segments of the public believe that a major event occurred that never did. (Nelson Mandela did not die in prison, even though millions of people misremember him doing so.) That Saudi Arabia and the US have had a 50-year petrodollar pact also plays into confirmation bias, another cognitive fallacy that confirms pre-existing anti-statist and anti-dollar biases.
