High stakes in petrodollar 2.0 deal proposal

AS A short opinion piece on the Nasdaq website noted, the 50-year-old petrodollar agreement between the United States and Saudi Arabia expired on Jun 9 without lament. For reasons best known to themselves, US mainstream news media have chosen to remain silent about the event. Some US commentators have even gone so far as to claim that there was no such agreement and that this is just another conspiracy theory. The blogosphere, however, has been abuzz with dire predictions on the fate of the US dollar as the world’s reserve currency.

So, was there really a pact between the Nixon administration and the House of Saud? On Jun 8, 1974, the voice of US establishment, The New York Times, reported on its front page: “Secretary of State Kissinger and Prince Fahd Ibn Abdel Aziz, Second Deputy Premier of Saudi Arabia and a half-brother of King Faisal, signed the six-page agreement at Blair House across the street from the White House this morning.”

The deal was about economic cooperation and supplying Saudi Arabia’s military needs, the paper went on to say. The text of the pact has never been made public but it became clear subsequently that with the agreement, President Richard Nixon had found a way to arrest the sharp decline of the US currency.

A brief history of the period will show both context and rationale for Nixon’s actions. In 1971, he upended the Bretton Woods monetary system and cut the US dollar’s link to gold. The greenback duly tanked. This triggered inflation. Nixon then imposed a price and wage freeze throughout the US for 90 days. Inflation was suppressed – for a while.

Then came the quadrupling of the crude oil price and the simultaneous Arab oil embargo designed to express their anger at US military aid to Israel during the October 1973 war. The US economy was again hit hard. President Nixon then set out to neutralise crude oil as an economic cudgel and find a way to persuade the Saudis to finance America’s deficit with this offer: Washington would buy oil from Saudi Arabia and in return provide the kingdom with crude-refining technology and military weapons. Crude would be sold exclusively for greenbacks; Riyadh would recycle their surplus dollars into US Treasury bills and other dollar-denominated assets and thus finance America’s spending.

Since oil was a vital commodity for almost every country, this deal ensured a steady demand for US dollars and a demand for US debt as a store of value in central bank reserves. Other Arab oil producers fell in line. This dispensation was in place until Jun 8.

What’s next? In late May, US national security spokesperson John Kirby disclosed that Riyadh and Washington were close to a “final agreement” for a new security and economic cooperation pact. One rider in the new deal would be for Israel to agree to a two-state solution in return for ties with Riyadh. Like in the June 1974 agreement, there was no public mention about oil or the greenback.

Given the expiry of the Nixon-era pact, the perceived need to thwart China’s growing heft in the Mid-east, and the Brics (Brazil, Russia, India, China and South Africa) invitation to Riyadh to join the grouping which aims for dollar-free trade among themselves, the timing of Kirby’s announcement suggests Washington is working frantically for a petrodollar 2.0 deal. The stakes couldn’t be higher.