In 1973, a significant agreement was reached between the President of the United States, Richard Nixon, and Saudi Prince Fand Ibn Abdel Aziz. This deal stipulated that Saudi Arabia, a prominent member of the Organization of the Petroleum Exporting Countries (OPEC), would exclusively trade crude oil in U.S. dollars with any nation purchasing their oil. In return, the United States would provide military protection to Saudi Arabia, supplying them with weapons and arms. This arrangement gave rise to the term ‘Petrodollar,’ representing the income generated from global crude oil trade between nations.
This was going very well for 50 years and most of the countries were using dollars as their medium of exchange for oil until March 8, 2023, when US with European Union and other western countries put sanctions on Russia due to war waged against Ukraine on 24th February 2022. They banned trade, which largely hit Russia’s economy and reached a point where it hit rock bottom. After the Russia-Ukraine started to unravel, Russia and India signed a deal, also known as ‘Rupee Ruble’ wherein they contracted to trade in their specific currencies for crude oil. Moreover, US and Europe becoming less dependent on West Asian oil imports and India and China becoming the main markets for GCC hydrocarbons made Petrodollar less reliable due to the ongoing issues with US and Saudi Arabia. India was determined to make its move to show its financial dominance as it has the potential to break the norm and as Shri Narendra Modi stated “Time has come when our strength and financial markets and institutions strive to become the backbone of international trade”. Furthermore, Russia also signed the deal with China, European Union and mostly with Saudi Arabia to lessen their dependence on US dollars for oil payments.
This development is poised to significantly affect the inflation-stricken U.S. economy. The loss of substantial income from the oil trade is imminent, mainly due to Asia’s central role in global oil commerce. As a result, there’s a risk of currency depreciation driven by a reduced demand for the U.S. dollar. This, in turn, could lead to elevated import costs, potentially exacerbating inflation and worsening the economic outlook. The question now arises: can the petrodollar system, which has historically accounted for 99% of global oil transactions, be phased out, or will the U.S. manage to find a way to sustain it?
