On June 9th, Saudi Arabia decided against renewing a deal with the United States to continue trading oil in U.S. dollars. As this represents a major shift in international trade, many independent and foreign outlets claimed the nation dumping the “petrodollar” would fundamentally change the global market. However, we’re now seeing U.S. media running stories claiming that was all phony baloney reporting. Let’s take a quick look at what happened in the hopes we might wrangle some truth from the situation.
Earlier this month, news broke that Saudi Arabia (the world’s largest oil producer after the U.S.) chose not to renew its 50-year petrodollar deal with the United States. The original deal was signed on June 8th, 1974, after the gas crisis and has since been attributed as one of the key ways the U.S. flexes its economic influence via making the dollar the world’s reserve currency.
The original deal was put together and signed by Henry Kissinger, the U.S. secretary of state at the time, and Prince Fahd, the second deputy prime minister (later king and prime minister) of Saudi Arabia. The U.S. saw this as a way to develop an economic relationship with Middle Eastern nations after it went off the gold standard and, ideally, encourage Saudi Arabia to produce more oil. In exchange, Saudi Arabia effectively fell under the protection of the United States and likewise laid groundwork so it could purchase U.S. weapons systems.
Dumping the dollar definitely seems to represent a weakening relationship between the two nations, especially since Saudi Arabia has been courted by BRICS nations that are vying to create an economic bloc that serves as an alternative to U.S. interests. Oil reserves has been a major aspect of this.
The assumption is that Saudi Arabia’s decision would negatively impact the dollar and throw the global market into a state of upheaval, even though the United States technically produces enough oil to sustain its own energy needs. Reports on the matter have been circulating globally for about two weeks. While MSN and a handful of other corporate outlets reported on the topic, coverage in the United States was largely limited to independent and social media.
That is until this weekend, when we started seeing articles calling the whole thing misinformation. Market Watch reported that claims of the longstanding agreement between the two countries having collapsed was “fake news” because “the agreement never existed.”
From Market Watch:
But as speculation about an imminent end to the U.S. dollar’s global dominance intensified, several Wall Street and foreign-policy experts emerged to point out a fatal flaw in this logic: The agreement itself never existed.
At least, not in the way it was being described in the posts that had gone viral on social media.
In a blog post published Friday, Paul Donovan, chief economist at UBS Global Wealth Management, remarked that the fake story had become surprisingly widespread, providing another lesson about the pitfalls of “confirmation bias.”
“Clearly, the story that is going around today is fake news. There was an agreement signed in June of 1974, but it had nothing to do with currencies because the Saudis carried on selling in sterling after that,” Donovan noted in an interview with MarketWatch.
Bizarrely, the outlet then goes on to explain the history of the agreement that allegedly does not exist, and how it impacted the oil industry, before noting that Saudi Arabia has indeed been pivoting toward other currencies.
The Economic Times published a similar article by arguing that the 1974 deal was never iron-clad, with no assurances of renewal. While it similarly strives to undermine the critical aspects of a less dollar-dependent oil market, its case was made more convincing due to having explored the nuanced nature of the oil industry and international trade.
Its argument was effectively that many large nations (including BRICS leaders) still have massive reserves of U.S. dollars due to years of global trade. The global oil market is likewise primarily tied to the dollar, even though other currencies are starting to become more common.
It seems that U.S. media is doing what it can to tamp down any fears about major quadrants of the oil market moving away from the dollar. Meanwhile, many foreign publications seem to be speculating that the petrodollar is losing its influence — forecasting higher interest rates and a weakening dollar.
The good news is that there haven’t been a lot of concrete statements from either side (at least not via the official channels) saying that there’s no chance of the deal being renewed later on. Drivers can likewise rest assured that even a hard pivot away from the dollar wouldn’t drive up fuel prices directly. Oil production would presumably continue at pace, with the United States technically capable of servicing its own energy needs.
However, the U.S. agenda has typically been to leverage the petrodollar as a form of global influence and export domestic energy at a higher profit and Saudi Arabia now appears to be considering joining BRICS. Countries dumping the dollar would likewise result in a weaker domestic currency, raising fuel prices indirectly over a longer period.
There has even been speculation that BRICS could force the United States to sell more energy domestically as it’s edged out of certain markets, potentially driving down local fuel prices. But this seems unlikely when the majority of our current petroleum exports go toward nations that presumably wouldn’t join a trading bloc that stands more-or-less against the United States.
If anything, the main takeaway should be that there seems to be a lot of uncertainty surrounding the oil market right now. Saudi Arabia even considering distancing itself from U.S. trade is indeed newsworthy, especially considering it’s the second-largest producer of oil in the world. But assertions that this volatility will totally undermine the U.S. dollar or domestic oil production overnight all feel highly speculative — as do claims that Saudi Arabia’s actions will have little-to-no impact on the broader oil market moving forward.
[Image: Hamara/Shutterstock.com]
Become a TTAC insider. Get the latest news, features, TTAC takes, and everything else that gets to the truth about cars first by subscribing to our newsletter.
