In a recent interview, Saudi Arabia Finance Minister Mohammed Al-Jadaan said the country is open to discussing trade in currencies other than the US dollar. This could mark the beginning of the end of petrodollar exclusivity. That would be a huge blow to dollar dominance.
“There are no issues with discussing how we settle our trade arrangements, whether it is in the US dollar, whether it is the euro, whether it is the Saudi riyal,” Al-Jadaan said in an interview with Bloomberg TV.
Al-Jadaan went on to say, “I don’t think we are waving away or ruling out any discussion that will help improve the trade around the world.”
Saudi Arabia ranks as the world’s largest oil exporter and the “petrodollar” serves as a crucial support for the US dollar.
Saudi Arabia has sold oil exclusively for dollars since 1974 under a deal with the Nixon administration. If the Saudis shift away from the dollar and sell oil in other currencies, it would be bad news for dollar dominance.
It’s not just Saudi Arabia supporting the greenback. The majority of global oil sales are priced in dollars. This ensures a constant demand for the greenback since every country needs dollars to buy oil. This helps support the US government’s “borrow and spend” policies, along with its massive deficits. As long as the world needs dollars for oil, there is guaranteed demand for greenbacks. That means the Federal Reserve can keep printing dollars to monetize the debt.
But if that demand were to suddenly disappear or even shrink significantly, it would be a big problem for the US economy.
ZeroHedge explained how the process works.
One of the core staples of the past 40 years, and an anchor propping up the dollar’s reserve status, was a global financial system based on the petrodollar – this was a world in which oil producers would sell their product to the US (and the rest of the world) for dollars, which they would then recycle the proceeds in dollar-denominated assets and while investing in dollar-denominated markets, explicitly prop up the USD as the world reserve currency, and in the process backstop the standing of the US as the world’s undisputed financial superpower.”
If the demand for dollars were to plunge, interest rates on US Treasury bonds would soar. This would be an untenable situation for a government servicing more than $31 trillion in debt.
And if Saudi Arabia were to begin pricing oil in other currencies, other oil exporters might follow suit.
China has been pushing for oil sales priced in yuan.
“We enjoy a very strategic relationship with China and we enjoy that same strategic relationship with other nations including the US and we want to develop that with Europe and other countries who are willing and able to work with us,” Al-Jadaan said.
While it doesn’t sound like the Saudis are prepared to totally jettison the dollar, there does seem to be an increasing likelihood the petrodollar could face competition for yuan, euros, and possibly other currencies. This is yet another sign that the dollar may eventually lose its status as the sole reserve currency.
Michael Maharrey is the managing editor of the SchiffGold blog, and the host of the Friday Gold Wrap Podcast and It’s Your Dime interview series.