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The late 1970s petroleum crisis gave rise to the petrodollar, which is more of a transaction than a currency. After the United States decided to abandon the gold standard, it reached an agreement with Saudi Arabia, one of the world’s top oil producers, in which the Saudis agreed to price their oil only in US dollars and invest any excess earnings from oil sales in US Treasury bonds. This accomplished a number of goals for the United States: it guaranteed the country’s oil supply; it made the dollar the world’s reserve currency; and it assisted in keeping the country’s federal debt manageable by today’s standards.

That contract has now been terminated.

“The United States and Saudi Arabia just allowed their 50-year-old petrodollar deal to expire. The term “petrodollar” describes the U.S. dollar’s function as the medium of exchange for crude oil on the global market. This arrangement dates back to the 1970s when Saudi Arabia and the United States reached an agreement soon after the United States abandoned the gold standard. The agreement had a significant impact on the world economy. Few agreements in the history of international finance have benefited the US economy as much as the petrodollar deal did.”

They are no longer available. Although it’s difficult to predict what will happen to the US economy, it’s probably not going to be positive. Although the dollar’s decline is likely to impact the cost of the petroleum we import, we do have certain domestic resources that can partially offset that. In the short run, this may even help the market for US gas and oil. Since petroleum has a global price and is a fungible commodity, American goods will be more appealing to international buyers in the absence of the petrodollar. Perhaps. However, the remaining impacts are more difficult to ignore.

The significance of oil’s valuation in US dollars transcends the boundaries of finance and oil. By mandating oil sales in US dollars (DXY), the agreement reinforced the dollar’s status as the global reserve currency. Consequently, this has had a significant effect on the American economy. The strong dollar is a result of the increased demand for dollars around the world to buy oil, which helps keep imports affordable for American consumers. Furthermore, the inflow of foreign capital into U.S. Treasury bonds has bolstered a strong bond market and cheap interest rates.”

Here are a few things to consider.

First, the impact on the dollar: As this is certain to happen, the dollar will weaken, which will primarily raise the cost of goods imported into the US. And from whom does the US import the greatest items, ranging from tiny trinkets to large-scale electrical transformers? China. As you may recall, China has a less than cordial relationship with the United States. Second, if the dollar loses its status as the world’s reserve currency, foreign investment in U.S. Treasury bonds, which primarily fund America’s extravagant spending, will almost certainly decline. There will be a swift and significant readjusting of interest rates, inflation, bond markets, and governmental debt that will not benefit American consumers.

The demise of the petrodollar might make the US currency and, consequently, the US financial markets weaker. A reduction in demand for the US dollar could result from pricing oil in a currency other than the US dollar. In turn, this might lead to increased interest rates, inflation, and a depressed US bond market.”

Author: Scott Dowdy

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