The recent reports about Saudi Arabia ending the longstanding petrodollar deal with the US have sparked discussions about the potential decline of the dollar as the world’s reserve currency. However, it’s essential to clarify a critical point: there was never an official agreement to begin with1. Here’s what we know:
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Background on the Petrodollar Deal:
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1. In 1974, Saudi Arabia and the US established a Joint Commission for economic cooperation. The aim was to help Saudi Arabia invest its excess oil revenue in US products.
2. As part of this arrangement, Saudi Arabia agreed to invest oil dollars in US Treasuries (although this remained confidential until 2016).
3. However, oil has always traded in non-dollar currencies, and Saudi Arabia indicated in January 2023 that it was open to negotiating oil sales in other currencies.
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Implications:
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1. Macroeconomic Impact:
1. If Saudi Arabia diversifies beyond the USD, it could weaken the dollar’s dominance in the oil market. This might lead to a decline in global demand for the greenback.
2. A reduced demand for the dollar could result in higher inflation, higher interest rates, and a weaker bond market in the United States2.
2. Microeconomic Impact:
1. For the average person, such changes may not be immediately noticeable. However, indirectly, they can affect the cost of living, interest rates on loans, and investment returns.
2. In Singapore, where the economy is closely tied to global trade and finance, any shifts in the dollar’s status could impact exchange rates, inflation, and investment portfolios.
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US Reaction:
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1. While there’s no official reaction from the US government, it’s crucial to recognize that Saudi Arabia remains a key ally. The US relies on Saudi Arabia for purchasing US arms (priced in dollars), and their relationship remains strong.
2. Large buyers in Saudi Arabia still prefer dollars due to their historical ties and the dollar’s stability.
In summary, the end of the petrodollar deal doesn’t automatically spell doom for the dollar, but it highlights the ongoing shifts in global financial dynamics. For the man on the street in Singapore, the impact may be indirect but interconnected with broader economic trends3.
Macroeconomic Implications
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The expiration of the petrodollar deal could potentially reduce the global demand for US dollars, as countries will no longer be required to hold US dollars to purchase oil from Saudi Arabia. This could lead to a decline in the value of the US dollar and an increase in the value of other currencies.
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If other oil-producing countries follow Saudi Arabia’s lead and start selling oil in currencies other than the US dollar, this could further reduce the demand for US dollars and potentially weaken the dollar’s status as the world’s reserve currency.
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Microeconomic Implications
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The end of the petrodollar deal could impact the US bond market, as Saudi Arabia will no longer be required to recycle its oil revenues into US Treasury bonds. This could reduce the demand for US debt instruments and potentially increase borrowing costs for the US government and businesses.
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The decline in the value of the US dollar could make US exports more competitive in the global market, potentially benefiting US companies that rely on exports. However, it could also increase the cost of imports, potentially leading to higher prices for consumers.
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Implications for Singapore
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As a small, open economy that is highly dependent on trade, Singapore could be impacted by changes in the global currency markets. A weaker US dollar could make Singapore’s exports more expensive and less competitive in the US market, potentially impacting the country’s economic growth.
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On the other hand, a weaker US dollar could also make Singapore’s imports from the US cheaper, potentially benefiting consumers and businesses that rely on imported goods.
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Overall, the implications of the end of the petrodollar deal are complex and uncertain, and will depend on a variety of factors, including the actions of other oil-producing countries and the response of the US government and financial markets.
