The new era of financial order: strategies for the post-petrodollar era

The emergence of the petrodollar system

The petrodollar system emerged in the early 1970s when the world economy was facing the oil crisis. In the midst of this crisis, the United States and Saudi Arabia signed an agreement that laid the foundation for international oil trade. According to this agreement, oil was to be traded worldwide exclusively in US dollars. In return, the United States offered military protection and economic support to Saudi Arabia.

This agreement was mutually beneficial: the US was able to maintain stable demand for its currency and Saudi Arabia received security and support. This agreement made the US dollar the main reserve currency, allowing the US to finance large trade deficits without jeopardizing the stability of its currency.

The importance of the petrodollar for the global economy

The petrodollar played a central role in the global financial architecture. Countries that imported oil had to build up dollar reserves, which increased the demand for the US dollar. This global demand for dollars enabled the US to consolidate its economic dominance and keep the currency stable. In addition, many countries that held dollar reserves bought US Treasury bonds, which helped US governments finance their debts.

Another advantage of the petrodollar system was that it facilitated international trade. By trading uniformly through the US dollar, there were fewer exchange rate risks and transaction costs. This promoted global trade and economic cooperation between nations.

The creeping erosion of the system

Over the past few decades, the petrodollar system has gradually lost importance. Geopolitical tensions and the rise of new economic powers such as China and India have increased pressure on the system. These countries have begun to develop alternatives to the US dollar to strengthen their economic sovereignty and protect themselves against potential US sanctions.

Another factor contributing to the erosion of the petrodollar system was the increasing instability of global markets. Financial crises and economic turmoil left deep scars on confidence in the US financial system. Countries such as Russia and China have begun to conclude bilateral trade agreements in their own currencies to reduce their dependence on the US dollar.

The role of the BRICS countries

The BRICS countries (Brazil, Russia, India, China and South Africa) have made significant efforts in recent years to reduce their dependence on the US dollar. They have increased their gold reserves and pushed for the formation of the BRICS+ group, which seeks an alternative currency system to protect against US sanctions. These measures underline their will to promote a multipolar world order and challenge the dominance of the US dollar.

The turning point: June 9, 2024

Saudi Arabia's decision on June 9, 2024 to sell its oil in other currencies marks the beginning of a new era. This decision will have far-reaching effects on the global economy. The immediate diversification of international oil trade will reduce the one-sided demand for the US dollar and put pressure on the currency in the medium to long term.

Conclusion

The end of the petrodollar is more than just an economic event; it is a geopolitical signal that shows how the global balance of power is shifting. In our next part of this blog series, we will look more closely at the geopolitical consequences of the end of the petrodollar and the impact on the international order.