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Petrodollar Panic: Separating Fact from Fiction

Birches Group provides insights into global labor market trends and developments, with a focus on events that affect labor markets around the world. 

In June 2024, stories claiming Saudi Arabia didn’t renew a 50-year deal with the United States (US) to keep oil priced in dollars sparked speculation about the petrodollar’s collapse. Online commentators warned this could undermine the US dollar’s status as a hard currency. 

But is there any truth to this narrative? Birches Group is here to cut through the noise and provide human resources (HR) leaders with the facts. 

The myth of the petrodollar agreement 

Contrary to recent speculation, there is no evidence of a formal “petrodollar agreement” between the US and Saudi Arabia. The misconception stems from a 1974 pact signed by US Secretary of State Henry Kissinger and Saudi Prince Fahd bin Abdulaziz Al Saud. However, the pact fostered close economic and military cooperation, not an exclusive oil-for-dollars arrangement. 

MarketWatch reports that the closest thing to a “petrodollar agreement” was a secret deal between the two nations later that year: the US promised military aid and equipment in exchange for Saudi Arabia investing billions of dollars of its oil sale proceeds in US treasuries. Bloomberg News reported the confidential diplomatic cable, obtained from the US National Archives, in 2016. 

While an agreement in late 1974 involved Saudi investment in US treasuries for military aid, this falls short of a formal petrodollar deal. Experts and fact-checkers have confirmed these claims to be inaccurate. 

Why the misinformation spread 

The recent spread of misinformation can be attributed to several factors: 

  • Unverified claims can quickly gain traction on platforms where critical scrutiny is often lacking.  
  • Heightened geopolitical tensions can create a fertile ground for the dissemination of misleading information.
  • Economic uncertainties worsen the issue, making people more susceptible to sensationalist stories that tap into their fears. 

Moreover, the fake news—pushed by “a combination of crypto speculators, gold bugs, and conspiracy theorists”—is an example of confirmation bias among those eager to see the dollar’s decline. Paul Donovan, Global Chief Economist at UBS Wealth Management, adds that “confirmation bias encourages people to ignore what is realistic if their prejudices are seemingly confirmed.” 

The resilience of the US dollar 

The petrodollar’s demise is not as imminent as suggested, and the US dollar’s strength is still secure, Wall Street and foreign policy experts say. 

The dollar’s strength is rooted in an interplay of factors, including the size and stability of the US economy, its role in international trade, and the established trust in its financial institutions.  

Research from the US Federal Reserve System shows that the US dollar’s global popularity doesn’t depend on the goodwill of oil exporters. It’s based on the US’s status as the world’s largest economy and goods importer, with deep, liquid capital markets backed by the rule of law and military power.  

“Saving oil in dollars is not fundamentally what makes the dollar powerful in global trade,” notes David Wight, author of Oil Money: Middle East Petrodollars and the Transformation of US Empire, 1967-1988. “The power of the dollar in global trade is why most oil is sold for dollars.” 

The reality of the US-Saudi relationship 

According to the London-based newspaper The New Arab, US-Saudi relations have improved in recent months. The reality is far more nuanced than a simple oil-for-dollars arrangement—it encompasses security, trade, and diplomatic ties.  

Paul Salem, President of the Middle East Institute, says that Saudi Arabia is looking for a “deeper security assurance and relationship with the US.” However, the geopolitical and economic landscape are very much different from what they were decades ago. 

Mark Finley, an Energy and Global Oil Fellow with Rice University’s Baker Institute for Public Policy, notes that the US economy has a smaller share of the global economy than it was 50 years ago. In addition, Saudi Arabia has recently worked to diversify its alliances, including increasing its ties to Russia and China. 

“Saudi Arabia has ambitions to establish itself as a regional powerhouse, and this involves a complex balancing act,” says Carla Norrlof, a Professor of Political Science at the University of Toronto and a nonresident Senior Fellow with the Atlantic Council. Nevertheless, recent shifts in Saudi foreign policy reflect a diversification strategy rather than a complete abandonment of the US dollar.  

A landmark trade and defense deal 

Amid rumors that Saudi Arabia is not renewing a petrodollar pricing deal with the US, both countries are in fact close to signing a historic trade and defense agreement.

In May 2024, media outlets such as Foreign Policy, NBC News, Reuters, and The Wall Street Journal reported that the two nations are reaching the final stages of a Strategic Alliance Agreement. The treaty would commit the US to help defend Saudi Arabia. In exchange, Saudi Arabia would grant the US access to its territory and airspace to protect US interests and regional partners. 

Fact vs. fiction: The final verdict 

The notion of a formal “petrodollar agreement” is a myth, and the US dollar remains a resilient currency.  

HR leaders must navigate the complexities of the global economic landscape with a discerning eye, separating fact from fiction, to make informed decisions that safeguard their organizations and employees. HR teams should rely on credible resources for information on developments. Additionally, they should keep a close eye on evolving international relations and their potential impact on global business operations. 

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