Has a 50-Year-Old Saudi Arabia-USA 'PetroDollar' Deal Ended? Here's What We Know

The deal did not exclusively bind Saudi Arabia to deal in USD.

The agreement between the two countries was signed in 1974.

(Source: The Quint) 

Over the last week, social media platforms have been flooded with a viral message which claims that Saudi Arabia has ditched the American dollar and will not renew its 50-year-old 'petro-dollar' agreement with the United States of America (USA).

Many news outlets such as India Today, FirstPost, News18 and Deccan Herald reported this story on 14 June.

An archive of the post can be found here. 

(Source: Facebook) 

(Archives of similar posts can be found here and here.)

However, all is not right in this post. Multiple questions arise, such as whether such a deal existed, what the deal was, and so on.

Let's understand the claim by breaking it down into simple questions.

1. Was There a 'PetroDollar' Deal? 

The post has claimed that the two countries signed a deal fifty years ago is 1974.

We looked into the details of this deal and found that although an agreement was signed between Riyadh and Washington, it is did not mention the points claimed in the viral post, as claimed in the post.

So, what is the agreement?: In June 1974, following the Yom Kippur War and oil embargo imposed by the Gulf countries, US Secretary of State Henry Kissinger and Saudi Arabia's Crown Prince Fahd signed an agreement to create two joint commissions: the US-Saudi Joint Commission for Economic Cooperation (JCEOR) and the US-Saudi Arabian Joint Security Commission (JSCOR).

• According to the agreement, the US government promised to provide increased economic and military aid to Saudi Arabia and in exchange for the promise to trade oil in US dollars. The remaining OPEC countries followed Saudi Arabia’s petrodollar precedent in 1975.

According to a New York Times article from 1974, the United States stated that the agreement would motivate Saudi Arabia to boost its oil output and act as a beacon for economic collaboration.

• The article stated that the agreement did not explicitly refer to oil. Both parties aimed to avoid giving the impression that the discussions were solely focused on oil.

• Similarly, Bloomberg reported in 2016 about this deal and wrote that the idea of the deal was, "The US would buy oil from Saudi Arabia and provide the Saudis with military aid and equipment. In return, they would put billions of their petrodollar revenue back into treasuries and finance America’s spending."

The Quint spoke to Dr Md Muddassir Quamar, Associate Professor at Jawaharlal Nehru University (JNU), who clarified that the deal was one of economic and military cooperation only, but did not compel the Saudis to trade oil only in US dollars.

He said, "There is no such thing as a formal petro-dollar treaty." Further, he said that there was no timeline, so it cannot be said that the treaty has "ended." Professor Quamar also told us that the treaty established a framework, and since it did not mention any timeline, it does not have to be 'renewed,' as mentioned in the viral post.

The 1974 treaty was such that both countries saw an opportunity and in exchange for trading petrol in USD which would make the dollar the leading currency globally, the Saudis would have gotten military guarantees. However, such an agreement was also established in the 1940s.

Dr Md. Muddassir Quamar, JNU

Weatherhead Center for International Affairs at Harvard University's publication Epicenter noted the same thing about tuch an understanding since the 1940s in an article from 2023.

Does Saudi Arabia only deal in USD for oil?

As stated before, the 1974 agreement does not bind Saudi Arabia to deal in dollars.

According to a report by Middle East Eye from 2023 noted that Saudi Arabia was 'considering' trading in currencies like the Yuan. It also stated that, like other Gulf states, the Saudis also pegged its currency to the dollar for ‘decades.’

A paper by the Manohar Parrikar Institute for Defence Studies and Analyses from 2023 noted that the under the Chinese President, Xi Jinping, in December 2022, the two nations entered into a 'Comprehensive Strategic Partnership', where China committed to maintaining significant oil imports from Saudi Arabia and the Gulf Cooperation Council (GCC). China also mentioned that the oil transactions would involve payments in Yuan to some extent.

• During his visit to Riyadh, the Chinese president discussed the potential of a 'petroyuan' with various Arab leaders. He mentioned that the Shanghai Petroleum and Natural Gas Exchange platform would be extensively used for RMB (renminbi) transactions in the oil and gas industry.

• The paper noted that China had been at the forefront of global oil and natural gas imports, with a significant portion originating from the GCC region. In 2018, China implemented oil contracts priced in yuan to enhance the international tradeability of its currency.

A report by the Wall Street Journal (WSJ) from 2023 noted that how dollar took a hit in the global oil market as some countries moved away from the 'petrol-dollar system.' In 2023, there were agreements including one between the UAE and India for purchasing crude oil using rupees, and another deal, a currency swap line, between Saudi Arabia and China valued at $7 billion.

Professor Quamar also told The Quint that the 1974 agreement did not exclusively bind Saudi Arabia to deal in US dollars. He said, "This has something to do with market forces. For example, if I am an exporter, I would want to trade in a currency that is most valuable."

US Dollar was most valuable so for the Saudis it was good. They could invest the dollars anywhere in the world.

Professor Quamar, JNU

He also mentioned that the Saudis were trying to diversifying their trade and economy and were looking for alternative markets.

"In both economic and strategic terms, Saudi Arabia want to reduce their reliance on the USA, however, it does not mean that the two are no longer partners," said Professor Quamar.

Quamar said, "The post is not entirely fake but manipulated reporting."

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