U.S.-Saudi petrodollar pact ends after 50 years

https://www.nasdaq.com/articles/us-saudi-petrodollar-pact-ends-after-50-years

by _ddzr • 2 years ago

295 325 2 years ago

GenerWork• 2 years ago

The title should say "50 year old petrodollar pact between Saudi Arabia and US expires." Anyways, I'm curious to see what happens next. I can't see Saudi Arabia ditching the dollar overnight.

wazoox2• 2 years ago

Nobody's ditching the dollar. However Saudi Arabia and China significantly reduced their investment in US bonds lately. Also notice that the interests on US debt come dangerously close to the whole of US discretionary government revenue.

"May you live in interesting times" as the (apocryphal) Chinese malediction says.

edit : added missing "discretionary". My mistake (you know, a simple honest error, not a "lie" or whatever).

malfist• 2 years ago

Also notice that the interests on US debt come dangerously close to the whole of US government revenue.

That is no where close to true, interest on debt last year was 985b, tax revenue was 3.29t

supplied_demand• 2 years ago

==Also notice that the interests on US debt come dangerously close to the whole of US government revenue.==

This is not true. Revenue was $4.44 trillion in 2023 [0] and debt interest was $650 billion [1].

[0] https://fiscaldata.treasury.gov/americas-finance-guide/gover...

[1] https://www.crfb.org/blogs/2023-interest-costs-reach-659-bil...

iamthirsty3• 2 years ago

Nobody's ditching the dollar. However Saudi Arabia and China significantly reduced their investment in US bonds lately. Also notice that the interests on US debt come dangerously close to the whole of US government revenue.

Revenue for 2023 was $4.4T[0], debt servicing cost was $624B. This year it's projected to be in the ~800s.

[0] https://www.statista.com/statistics/216928/us-government-rev....

tekla• 2 years ago

Why do people lie about trivially disprovable things?

JumpCrisscross30• 2 years ago

Saudi Arabia and China significantly reduced their investment in US bonds lately

They’re both massively deficit spending.

westcort• 2 years ago

Made this change

samspenc• 2 years ago

Finance influencers and online forums have been abuzz with this news the past few days but now that it is happened ... looks like nothing changed? Oil prices, the US dollar and the markets seem stable?

Is this one of those events that turn out to have been "much ado about nothing"? I'm not an expert in this area, curious if anyone has more insights into this.

vel0city9• 2 years ago

If this causes major shifts, I don't imagine they'll be apparent on day 1. Its not like Saudi Arabia was eagerly awaiting to burn some major bridges with the US. Check back on day 365, or day 3650.

rickydroll• 2 years ago

I would not be surprised if this became an "October surprise" to weaken Biden and the Democrats further.

nonrandomstring3• 2 years ago

Its not like Saudi Arabia was eagerly awaiting to burn some major bridges with the US.

Bridges aren't typically their target.

https://en.wikipedia.org/wiki/Alleged_Saudi_role_in_the_Sept...

adventured• 2 years ago

The US is now the world's largest energy producer, oil and natural gas. Saudi Arabia's security context is anything but solid. I'd question whether they have much room to play with in terms of messing with the US (maybe at the edges, nothing fundamental). I suppose they could sign a large strategic guarantee with China as a form of diversification of security.

ryandrake• 2 years ago

There's that quote, which always seems to get misattributed to a different vaguely-middle-eastern public figure every time it's repeated:

"My grandfather rode a camel, my father rode a camel, I drive a Mercedes, my son drives a Land Rover, his son will drive a Land Rover, but his son will ride a camel."

Whether or not anyone actually said it, it seems to be more and more likely as oil verrrry slowly becomes less and less relevant.

Glawen• 2 years ago

These type of event cannot be evaluated just days after. The outcome will be clearer in the coming years.

Look at COVID crisis, we are yet to fully understand the consequences of the government monetary actions

drivebyhooting3• 2 years ago

Why is this downvoted?

barnabyjones• 2 years ago

The monetary actions don't seem that important compared to fiscal, rate changes are normal and people are still buying things and making investments. But the gov't could have practically bought Dubya another Iraq war with all the money that was given away, much of it to fraudsters or people who otherwise have no need of welfare assistance.

netsharc• 2 years ago

My thoughts as someone who reads too much news (but probably not enough to be knowledgeable):

I could imagine negotiations going on behind closed doors. The USA is still a gorilla with firepower that can be used as leverage. But MBS is an unstable egomaniac who probably doesn't respond well to threats... My guess is China is trying to woo him, although China doesn't seem to do "diplomacy by aircraft carrier", at least not outside its own seas. I wonder if Putin has any influence, at the moment he can only be China's little brother, and besides, he's friends with Iran and S.A. and Iran aren't friends...

A4ET8a8uTh0• 2 years ago

I guess we have to go back to the basics. Is USD considered a safe haven compared to other currencies/commodities? If yes, nothing will likely change. If no, they might.

It is possible that this is one of those few scenarios, where it is a 'good thing' that world is distracted by Ukraine/Russia war and Israel/Palestine; oh and elections.

Full disclosure: I asked uncensored llama, but its predictions seemed off to me.

coldtea4• 2 years ago

but now that it is happened ... looks like nothing changed? Oil prices, the US dollar and the markets seem stable?

It's not a falling meteor, it's an trade/agreement/commercial change.

The impact of this takes months or even years to fully develop, and cascades with other factors.

jandrewrogers• 2 years ago

This is a vestige of the 1970s, it isn't particularly relevant in a world where the US is an oil and gas producing juggernaut. The geopolitics of oil are very different than they once were. The conspiracy theories around the petrodollar have always been a bit overwrought.

It is no different than China divesting US treasuries. There were people that asserted this would be apocalyptic but there was nothing substantive behind those fears. And then it actually happened and no one noticed.

elzbardico24• 2 years ago

Oil is what matters less here. The point is that the ability of the US to refinance its debt and support the massive consumption levels of the American people through cheap imports and massive trade deficits rely on a healthy global demand for the USD.

The Us is now a massive producer of oil, but it is not a massive net exporter of it, because it consumes a lot. So, when the big net exporters of oil decide to accept other things in payment in lieu of the USD it inevitably has a depressing effect on the global demand for the dollar.

cjensen• 2 years ago

Saudi Arabia lives in the same trap China does with respect to the dollar: they own so much dollar-denominated wealth that they have no interest in intentionally destroying the dollar. They may sensibly diversify going forward, but diversification is a long way from the kind of everything-must-go selloff of dollar assets that would be required to harm the value of the dollar.

aylmao7• 2 years ago

Brexit is one of the biggest "shock" events to have happened in recent history, but little really changed in the short term for Britain. An average brit who wasn't in the import/export business probably didn't notice anything the day of, or the day after Brexit.

It's been slow, and one can argue, visible now in the long term "in the graphs". Recovery from COVID was slow. There's a creeping cost-of-living crisis, productivity has been stagnant, investment low, etc. Some might attribute this at least in part to Brexit, some may not, but the truth is, wether Brexit played a role or not, this is how it would surface— slowly, and in the charts.

ben_w• 2 years ago

Brexit also had a 10% shift in currency value as soon as the markets could react to the news.

I don't know how big a deal this news is on the markets, especially given everyone's already trying to shift to renewables. And it might have been predicted in advance, unlike Brexit where the markets expected Remain.

dmix• 2 years ago

Are you sure those same things aren't happening across Europe? sounds a lot like Canada too

dragonelite• 2 years ago

For the US not much will change in the short or medium term because the pact was about exclusive dollar payment for energy deal. But this will open up the road for Saudis and OPEC to speed up dedollarisation and diverse their currency reserves(ruble, dollar and Yuan), they already made the steps by accepting Yuan some year ago. Russian Central back also today announced that Yuan will be the main foreign trade currency instead of the Euro and dollar. That pretty much means China has free flow access to energy, food and maybe weapons/shells if needed for a war.

ur-whale• 2 years ago

much ado about nothing Did you seriously expect this to have an impact over a timespan weeks ?

Geopolitical stuff, with some exceptions, tends to unravel over years or decades.

This is a sizable event, and it will likely have quite an impact, but unless they renegotiate it , it's going to be a decades long thing.

daedrdev2• 2 years ago

A key thing is that the US is now the biggest oil producer, so the exact agreement is less important since the US uses more of its own oil, with the money never having left the US in the first place

taylodl7• 2 years ago

The US is unable to refine the oil it produces. We're setup to refine Saudi oil and no, they're not the same thing. Also no, you can't just change the refinery without a significant capital investment. That money has to come from somewhere.

woodruffw• 2 years ago

Do you have a source for this? I couldn't find one with some quick searching.

(Not that I don't believe you, I hadn't heard it before.)

vel0city9• 2 years ago

As someone who lived down the street from a significant number of refineries which refined US oil, you're pretty wrong about this.

Most oil produced in the US is refined and used in the US. For a long time US oil couldn't be sold overseas. I don't know who would have been refining that oil if not for the US, given they literally couldn't sell it internationally.

The US produces around 12 million barrels of oil a day. The US exports under 4 million barrels a day. What do we do with the other 8 million barrels??

localfirst2• 2 years ago

Canada routinely sends oil to US for refinement and buys it back at a higher price.

AnAfrican• 2 years ago

I’m pretty sure US refeneries are not setup to refine Saudi oil. I remember it being the case with Venezuelan oil and that fact being a boon for West African oil producers when things were sour between the US and Venezuela.

redleader55• 2 years ago

The US crude is "sweet", the easiest oil to be refined. US is the main source of technology for the "sour" oils - Russia, Saudi, Venezuela, etc.

Regarding currency, US will be fine pretty much whatever happens - there is no other currency that is not controlled, in large supply, and globally accepted.

grumple• 2 years ago

The US refines 20% of global oil. This is the most of any nation. We buy cheap crude and sell the higher quality stuff because that makes us more money. My understanding is that we could switch to refining light sweet if we ever needed to, and this would be easier than other nations doing the opposite (refining heavy sour).

The US is clearly the heavyweight globally in terms of both oil production and refining.

thsksbd3• 2 years ago

The petrodollar was never about access to Saudi oil. Even when we imported large amounts of oil, we also produced a lot and we had very many different suppliers.

The petrodollar was about creating a massive market for USD despite us having a massive trade deficit. Every country that wanted to buy oil had to hold USD and US treasuries to buy the oil.

This cemented the USD as the world currency therefore financing our budgetary (as opposed to trade) deficit with cheap interest rates.

daedrdev2• 2 years ago

I guess my point is that the USD has many other reasons for being the world currency, (firstly the lack of alternatives) and the money that was spent on Saudi Oil and would partly come back due to the petrodollar now stays in the US on US oil so its not like the US has lost any value.

halJordan• 2 years ago

Why do you guys insist on presenting as an educated authority but get such basic verifiable facts wrong? Among other things, the US was absolutely worried about maintaining access to Saudi oil. And the us-saudi "oil for protection" scheme stated in the 40s when the US was the world's factory.

Its not even the wrong facts, it's that you could just Google it and still present as this authority you want to be, but actually be correct.

moralestapia2• 2 years ago

People who make a big fuzz about this haven't truly done the math on the scale of it vs. the US dollar worldwide.

Saudi Arabia oil exports are 200B USD/year, give or take. The world has a GDP of ~100T USD, how much of that is traded in US dollars? We could put an estimate based on total currency reserves, of which USD is about half of that. 200B out of 50T is "merely" 0.05% ...

Sure, they may be one of the single major traders of USD, but at 0.05% what this tells you is that the USD is extremely diversified, and that's good!

(Also, this is implying Saudi Arabia bins the whole deal overnight, which is very unlikely to happen)

shortsunblack• 2 years ago

Oil, as any energy, has multiplier effects. That 200B USD is responsible for major part of the 100T USD.

JumpCrisscross30• 2 years ago

That 200B USD is responsible for major part of the 100T USD

We are the world’s largest oil producer [1].

[1] https://en.m.wikipedia.org/wiki/List_of_countries_by_oil_pro...

taylodl7• 2 years ago

Looks like the US is going to have to finally start paying its bills. That is going to be a shock to Americans. Easy credit may be a thing of the past as well. I'd really hate to see the financial turmoil of the 70s come back - it was tough enough living through it the first time.

What if gasoline prices start soaring in the US, putting US prices on parity with the rest of the world? Remember the financial collapse of 2008? That didn't happen overnight either - it took a couple of years for everything to unfold and collapse.

georgeecollins• 2 years ago

The US is the largest producer of oil in the world. If the price of oil went way up a lot of things would happen including the US would start producing more oil as marginal projects would start to make economic sense.

The second thing that would happen is people would start buying more hybrid and electric cars.

I have no idea what will happen to the price of oil. I do think that in general people who say things like "finally the US will start paying its bills!" are often not very sophisticated investors. They don't have finance degrees, work on wall street, or have long history as investors. Not that that precludes them from being right! But they could also just be people with an axe to grind and little to lose.

matthewdgreen• 2 years ago

Oil demand is set to peak by 2030, mostly due to massive buildouts of renewables (with China taking the lead.) Oil isn’t going away, but anyone taking the “oil prices are going to soar long term” side of the bet is making an incredibly stupid bet that will end in tragedy. (Anyone making the “US oil prices will soar in the short term” bet has to deal with record US shale production.)

The losers here are the middle eastern countries that didn’t sufficiently diversify.

graeme• 2 years ago

This really shouldn’t be the top comment. USD is very convenient and desirable to use and no other currency comes close as a replacement reserve currency.

If the agreement was extremely inconvenient the Saudis would surely have found a way around it. Rare is the economic agreement that stands against efficiency.

There’s a meme going around certain circles that the USD is doomed and everyone is going to use….Yuan, Rubles? The Euro? Yen?

It simply isn’t plausible. The USD wins out because it is very useful. I write this as a non-American who transacts business mostly in USD, including with non-American contractors and companies.

The US may or may not have to pay its debts but this pact does not seem very relevant.

blackhawkC172• 2 years ago

There’s a meme going around certain circles that the USD is doomed and everyone is going to use….Yuan, Rubles? The Euro? Yen?

Many people (usually envious ones) want the USD dominance to go and repeat the meme/lie to the point of believing it themselves.

It’s just a new way of ranting, and this topic is very common with conspiracy theorists.

taylodl7• 2 years ago

No currency comes close as a replacement reserve currency? Elect Trump in November and see how fast the euro becomes the world's new reserve currency!

tw04• 2 years ago

What if gasoline prices start soaring in the US

Then all of the fracking fields that are already permitted would be fired back up and there would be low-skill/no-skill workers making 6-figure salaries again in the fields in the Dakota's.

elzbardico24• 2 years ago

Gasoline prices, the price of oil itself is not the biggest issue here. What is important is that any reduction on the global demand for dollars and USD denominated treasury bonds can have a chilling effect on the ability of the US to maintain its gigantic trade deficits year over year as well as re-financing government debt.

ikekkdcjkfke2• 2 years ago

Isn't one of the strengths of US is it's gigantic financial system, being able to absorb huge trades

gbr4• 2 years ago

These types of geopolitical shifts are not ones that will unfold over a matter of weeks, but rather over years or even decades. The intricate and multifaceted discussions around energy and economic interests between the BRICS nations and the West will play a crucial role in shaping this long-term transition.

toomuchtodo3• 2 years ago

OPEC is desperate. 20% of vehicles sold globally last year were EVs and hybrids (to a lesser extent). The world is getting off of oil and the sandbox is not prepared for life after. A petrodollar was always to become irrelevant if climate goals were to be met.

https://www.cnbc.com/2024/06/13/opec-calls-for-more-fossil-f...

https://www.iea.org/news/slowing-demand-growth-and-surging-s...

https://about.bnef.com/blog/electric-cars-have-dented-fuel-d...

jerry1979• 2 years ago

The other side of this argument is that the world is not getting off oil. We will need the oil if we want to get every nation up to a Euro/US standard of living.

toomuchtodo3• 2 years ago

BYD would like to have a word. They now employ twice as many workers as Toyota.

https://www.statista.com/chart/30754/byd-passenger-car-sales...

https://electrek.co/2024/05/29/byds-workforce-nearly-doubles...

https://electrek.co/2024/05/15/byd-just-hit-new-weekly-ev-sa...

JumpCrisscross30• 2 years ago

the world is not getting off oil

It’s destroying demand at a massive clip, if the IEA is to be believed [1]. With Riyadh’s elevated break-even price [2] that doesn’t leave them a lot of time.

[1] https://www.axios.com/2024/06/12/oil-peak-demand-iea-project...

[2] https://fred.stlouisfed.org/series/SAUPZPIOILBEGUSD

ssijak• 2 years ago

https://www.statista.com/statistics/271823/global-crude-oil-...

paulddraper• 2 years ago

Automobiles are a quarter of U.S. petroleum consumption.

And the average age of U.S. automobiles is 13 years.

EV/hybrid's effect on current oil consumption is 2% at the very, very most.

philipkglass2• 2 years ago

https://www.eia.gov/energyexplained/oil-and-petroleum-produc...

Gasoline is the most-consumed petroleum product in the United States. In 2022, consumption of finished motor gasoline averaged about 8.78 million b/d (369 million gallons per day), which was about 43% of total U.S. petroleum consumption.

CRConrad• 2 years ago

And the average age of U.S. automobiles is 13 years.

OK, but what's the median age of U.S. automobiles? I think that's a more relevant merasure.

coldtea4• 2 years ago

Yeah, not really. Both US and global oil consumption is at record highs:

https://www.ceicdata.com/en/indicator/united-states/oil-cons...

and expected to get higher:

https://www.statista.com/statistics/271823/global-crude-oil-...

(the dip is Covid)

Meanwhile:

https://eu.usatoday.com/story/money/personalfinance/2023/11/...

https://nymag.com/intelligencer/article/a-once-unthinkable-q...

https://edition.cnn.com/2024/04/02/business/tesla-sales/inde...

https://www.business-standard.com/economy/news/ev-sales-decl...

shin_lao• 2 years ago

Less than 15% of oil is used for personal cars. The OPEC is fine.

aylmao7• 2 years ago

The world is getting off of oil

This is true, but also misleading. The fact we're getting off of oil, doesn't mean we're doing it fast enough, or that less oil is being consumed today than in the past. At least when measured in TWh of oil consumption per year, we're still up and to the right [1].

[1] https://ourworldindata.org/grapher/oil-consumption-by-countr...

Consumer vehicles are increasingly electrifying, but that shouldn't be used as a metric to assume oil consumption is decreasing. At least 4 reasons why the correlation isn't that strong:

- Consumer vehicles are only a percentage of the transportation sector. A lot of oil is used by the transportation industry. Electric trucks are still not widely available. Electric trains for cargo aren't growing quickly enough. Electric planes and ships are still not viable for transport.

- Electricity can be generated from oil. Assuming that more electric vehicles means less petrol consumption ignores the fact the increased electricity demand could be covered by petrol. What's correct here is to both grow electric vehicle usage, and production with renewables.

- The economy and population keep growing. If half of cars sold are electric, but you're selling twice the number of cars total vs 10 years ago, you're selling the same amount of petrol cars.

- There's plenty of demand for oil not as a source of energy, but as a material (for plastics, asphalt, other chemicals, etc)

carlosjobim• 2 years ago

Oil consumption is higher than it has ever been. Coal and gas consumption as well. Looking at new car sales to the richest class of people is probably not telling all. Oil is a great energy source. If it's not used by commuters, it will be used for other things.

havefunbesafe• 2 years ago

Other things specifically being pretty much everything around you. Clothes, packaging, the case on your phone, etc.

elzbardico24• 2 years ago

Cars are a percentage of the global Oil usage. And meanwhile, consumers are getting increasingly cold-footed about EVs.

bananaflag• 2 years ago

Any serious source on this?

JumpCrisscross30• 2 years ago

Yawn. Wake me up when Saudi Arabia floats its currency and unpegs from the dollar [1]. (Which, to be clear, I think they should do if they’re serious about diversifying their economy. It would be difficult, however, as it would likely de-value domestic assets which hurts the elite,)

[1] https://www.arabnews.com/node/1682011

localfirst2• 2 years ago

Unlikely as SA depends on US for security

And unlike other regions, quantity is just not possible due to environmental constraints so they must rely on Western high tech

The Saudi's want nothing to change but people think EV sales is a threat (couldn't be further from the truth).

JumpCrisscross30• 2 years ago

Agree. Just saying it would be good for their economy. (And if done properly, could be supported by the U.S.)

lyu07282• 2 years ago

Yeah it's just a piece of paper at the end of the day, the US just invades/coups anyone who seriously threatens the us dollar anyway.

https://en.wikipedia.org/wiki/United_States_involvement_in_r...

janandonly2• 2 years ago

I am very confused now because usually nasdaq is a highly regarded and well informed source of information.

But here there are some glaring mistakes and omissions in the article:

1. Saudi Arabia has already been trading oil in other currencies for some years now. Have they been violating their own protection deal?

2. Or was the deal never put on paper and more of a “gentleman’s agreement” to begin with?

3. The suggestion is made that the end of this deal will mean a declining US dollar. The fact is that the dollar has been declining for a while already and this hasn’t sped up after the end of this “deal”.

Also, for context: https://news.ycombinator.com/item?id=40674426

JumpCrisscross30• 2 years ago

usually nasdaq is a highly regarded

It’s a TipRanks article syndicated by Nasdaq. Sort of like what Fortune did to its brand.

consumer4517• 2 years ago

Thanks for mentioning this, I hadn't noticed.

hackandthink2• 2 years ago

Always bet on Javascript and the dollar.

https://www.nakedcapitalism.com/2024/06/dollar-doomsters-hav...

aylmao7• 2 years ago

I mean, the conclusion of this post isn't precisely claiming a USD victory:

So at this point, the most likely next regime is of fragmentation, of multiple major currencies used for trade and investment rather than a dominant currency. [...] So this remains an unsettled area. Stay tuned.

And I agree. I don't think the Renminbi will necessarily take over, but I also don't think the dollar will maintain the strong dominance it has on global trade and as a reserve currency.

hackandthink2• 2 years ago

Noah Smith agrees as well:

"I’ve argued that dollar-euro financial hegemony won’t be replaced as a result of these sanctions, simply because none of the alternatives is ready to replace it. But ..."

https://www.noahpinion.blog/p/dont-worry-about-de-dollarizat...

I think the system is stable instable:

Dollar Inflation will continue. China will continue to have problems investing its trade surpluses sensibly. Western policy towards Russia and China will become even more hostile, but it will not come to a big bang.

At some point, we will realize that we have to solve the problems together, perhaps the Bancor will be introduced after all.

pkaye• 2 years ago

There is a another agreement long in the works that involves a defense treaty but also involves normalization with Israel and path to Palestinian state. But it will probably risk getting dragged into another conflict given the Houthis are their neighbors. Also Saudi Arabia has human rights issues. So in the end I don't know how Congress will vote on this. Would having a Palestinian state resolve all tensions in that region?

AnimalMuppet• 2 years ago

All? No. There would still be Sunni vs. Shiite, at a minimum. I think Saudi vs. Houthi has an element of that, though I'm not sure.

FrustratedMonky• 2 years ago

Any theories if this is beginning of the end of Dollar, and thus US?

This dollar=oil relationship has been used as the argument for US dominance for a long time. Or, used to explain how the US maintains dominance. And consequently, this is also used as the boogie man in many theories about a US collapse.

So doom scenario would be Saudi, Russia, China forming some new Oil market that does not use US Dollars.

JumpCrisscross30• 2 years ago

dollar=oil relationship has been used as the argument for US dominance for a long time

The dollar’s dominance was won at Bretton Woods (decades before the petrodollar) on the back of WWII.

The petrodollar was a contributor to dollar hegemony from the 1970s through the 2000s. But the combination of the USSR falling and American energy independence thoroughly ruined it as an explanatory factor for dollar and Treasury pricing and utilisation in the post-crisis landscape.

elzbardico24• 2 years ago

This is itself inconsequential. Nobody is going to start frenetically doing oil business in Yuan just because this agreement has expired.

While it is true that the will probably slowly shift during the coming decades to some degree of de-dolarization, it is not going to happen overnight and neither is the expiration of this agreement a prime mover of that. Freezing Russia's sovereign assets was far more consequential as it eroded the trust on the westerns financial system somehow.

But all those upcoming powers like China, India have a vested interest in the continued survival of the dollar, as they hold (both the states and private companies) vast amounts of assets tied to the dollar. They may try to reduce their exposure a bit, but they know that they can't do a firesale of US bonds as it would obliterate a lot of their wealth.

Things will keep running as today probably for the next 20 years. Meanwhile the US will have the chance to re-industrialize itself as the dollar gradually weakens.

And this leads us to the other dollar's secret. NOBODY wants to hold the world's reserve currency anymore. It may be good to make your rich absurdly rich, to sustain absurdly high levels of consumption fueled by imports, but it inexorably erodes your industrial base.

scrubs2• 2 years ago

Do you agree this is yet another tactical or strategic setback meaning it's only more critical to get our debt spending in order since we can less depend on outside investing on t bills?

elzbardico24• 2 years ago

Of course! Not only is essential that the US starts tackling its debt, but also it needs to be aware that the massive trade debt days where the US imports the industrial output of the world in exchange for treasure YOUs will someday come to an end.

Re-shoring industry is essential for the US to keep itself as a major player in the future multi-polar world.

tootie• 2 years ago

It also seems the Fed can just absorb whatever it needs to. And it's not like Japan needed to be a global reserve currency to sustain massive debt. De-dolarization seems unlikely to cost much aside from prestige.

elzbardico24• 2 years ago

Japan is a massive exporter, while the US is a massive net importer. American industrial production depends heavily on global supply chains, and thus, american prosperity requires a healthy global demand of US dollars.

treflop2• 2 years ago

These agreements are just agreements.

The dollar has been the reserve currency for a long time because (1) the US has been a big promoter of liberalization and world trade, but really most importantly, (2) despite various conflicts, the US currency has been consistent and stable for decades, and everyone who values stability is going to want to park their value in a currency that continues to be boring. So far, the US has been able to scratch that itch because it’s been the same government that has been predictably the same for nearly 250 years.

Now it doesn’t mean the world’s reserve currency won’t change over time but if it does, it’s because some other country or group of people have managed to establish themselves as equally boring for decades. And by the time that happens, the world will have already changed significantly already.

Really, the reason the US Dollar has held for so long is because the rest of the world has had a lot of instability (think world wars, governance changes, unions of countries formed or abolished, etc.). The US hasn’t even had a change in states in 60 years.

tcbawo• 2 years ago

Don’t forget strong property rights, fairly impartial justice system wrt foreign representation, and a large body of corporate case law with predictable outcomes

outop• 2 years ago

So far, the US has been able to scratch that itch because it’s been the same government that has been predictably the same for nearly 250 years.

This is an exaggeration. There have been at least 3 drastic shocks to the United States currency in that time. The secession of the southern states, who adopted their own currency. Leaving the silver standard for the gold standard. And devaluing the dollar then leaving the gold standard unilaterally in the 1970s.

elzbardico24• 2 years ago

I would say that the freezing of Russian assets has changed this equation considerably for almost every non-western country.

People seem to think we are still living in the past, where the US alone accounted for more than 40% of the global GDP and was the single most important trade partner of every country outside the former communist block.

It is a different world now. The BRICS GDP in Purchase Power Parity terms has surpassed the G-7, their growth rate is also bigger.

Yeah. it is not the end of the world. Things won't change everyday, zero-hedge doomers are a bunch of crazy scammers shorted as fuck. But the situation is dynamic and requires attention.

chiefalchemist3• 2 years ago

Really, the reason the US Dollar has held for so long is because the rest of the world has had a lot of instability (think world wars, governance changes, unions of countries formed or abolished, etc.). The US hasn’t even had a change in states in 60 years.

Yes and no. What you're not comsidering is the obligation of The US Federal Reserve (aka The Fed). While dollars are international, The Fed's only concern is the US and US citizens. That is, often enough The Fed makes decisions that achieve this ends, but screws the rest of the world. Such decisions become self-serving to the USA's power, influence, etc. That decision undermines other countries, economies, etc.

So yeah, the USD is stabler, and The Fed helps to see to that.

seanmcdirmid• 2 years ago

The availability of US treasuries is also a big appeal of the dollar. There really aren’t many places where you can safely park a few billion or even a few ten billion in USD equivalent. The US government is basically a debtor of last resort.

wslh• 2 years ago

It is also good to check with number examples about the interest of operating in USD, it is like the interest of using USB Type C or other standard plugs instead of a custom one. The US stocks market cap is USD ~54T [1]. The China one is less of 1/4 of the US one. The bond market capitalization [2] is different but 62% is composed by US, China, and Japan.

[1] https://en.wikipedia.org/wiki/List_of_countries_by_stock_mar...

[2] https://www.icmagroup.org/market-practice-and-regulatory-pol...

asdasdsddd• 2 years ago

And this leads us to the other dollar's secret. NOBODY wants to hold the world's reserve currency anymore. It may be good to make your rich absurdly rich, to sustain absurdly high levels of consumption fueled by imports, but it inexorably erodes your industrial base.

Also the US can leverage another countries reserves against them

manquer4• 2 years ago

This is how it will play out in the next 20-30 years you are thinking about

They can't do a firesale of US bonds

they aren’t buying a lot of new American bonds and keeping the bond market strong with private buyers. It is why the fed buying treasury bills in the quantities they do is troubling.

Interest rates aren’t going to back zero, they will drop from the current highs but interest will remain positive.

The debt to GDP ratio has jumped massively in last 40 years from 30 % to 60% in 2000s and now 120%, that is an impressive amount of spending considering how large the US economy is . [1]

At some point the either spending on programs have to be cut or taxation has to increased, or inflation has to be allowed to increase significantly to service it.

The policy paralysis in Washington almost by design will not allow for either of the first two solutions to happen which would be internal to the country, so likely in next 20-30 years we are looking at runaway inflation .

At the point dominoes will be too late to control, if dollar no longer is a strong reserve currency , interest rates will go up , either we default or massively rebalance the economy after getting a bail out (! No country or institution like IMF is large enough to remotely even attempt bailing out America ) .

The pain will be global of course , but nobody will be able to do anything about it.

[1] In itself the ratio is not a problem, In OECD countries high numbers can work for long while, Japan holds 250% + of debt to GDP ratio famously , but now after 30 years of weird economics they are slowly being forced to raise interest rates positive or face the yen falling and it will be costly either way

JumpCrisscross30• 2 years ago

they aren’t buying a lot of new American bonds

Because they’re deficit spending.

epicureanideal2• 2 years ago

If they would at least use most of the deficit spending for things with positive ROI that would be reasonably ok..

roenxi4• 2 years ago

In itself the ratio is not a problem, In OECD countries high numbers can work for long while, Japan holds 250% + of debt to GDP ratio famously

One of my missions-for-fun on HN is to figure out why anyone cares about Japan's debt:GDP ratio. The country is a net creditor [0]. The US is the worlds largest debtor by an order of magnitude in absolute terms, and up there with just outside the beyond-hopeless tier of debtors. Superficially the two countries seem to be incomparable. Japan's credit position is almost an anti-US on net, relative to GDP. Why would we look at a creditor to figure out how a debtor's default would work?

[0] https://en.wikipedia.org/wiki/Net_international_investment_p...

SubiculumCode2• 2 years ago

Another doomerism that will fail to materialize, I suspect. Sometimes too many people are almost eager for the other shoe to drop. But if America is too big and powerful to bail out, then maybe they won't need to get bailed out on...wait for it...debt denominated in their own currency. Fiat is powerful that way.

No, I think the way to continued prosperity are the old principles: Free Markets, Liberal governance, Property Rights, Fighting corruption, and Ensuring robust multilevel competition in the marketplace.

chiefalchemist3• 2 years ago

Sidebar and perhaps slightly off topic. One of the trigger moments in the Nazi's rise to power was the USA's stockmarket crash, and how the side effects of that ripped a nasty hole in the German economy.

In watching the Netflix doc on the eise of the Nazis, it enlightening how many actions (and inactions) of the USA contributed to the rise of the Nazis. No doubt Hilter & Co were an evil bunch but in terms of popular support and rising to power, they did not do it alone. They had plenty of help.

consumer4517• 2 years ago

Nobody is going to start frenetically doing oil business in Yuan just because this agreement has expired.

I am highly uneducated in this realm, but would this even be possible as the Yuan is a nonconvertible currency?

elzbardico24• 2 years ago

I am talking informally. The Yuan is not fully convertible, but yet, it can and it is used for trading goods and services. It is not attractive as a reserve currency or as an investment, but on bi-lateral and tri-lateral trade it is perfectly usable. And as china is the biggest manufacturer in the world, for a lot of countries it may make sense to trade in yuans. Sell some copper to China in Yuans, buy some SU-35s from Russia using Yuans, then Russia buys chips from China with those Yuans.

pclmulqdq3• 2 years ago

As far as I am aware, the Yuan (essentially a unit quantity of currency) is fully convertible and can be traded, but the Renminbi (the currency itself) is not. It's a bit weird that these are not the same thing. It may not be possible to use the Yuan for everything you need without also moving some Renminbi around. However, you can use the Yuan as the unit on which the trade balance of a country is counted - $1 billion Yuan of oil against $1 billion of silicon chip for example - without any Renminbi changing hands.

csomar4• 2 years ago

They created a convertible market in hong kong. The currencies are the same but can be de-pegged (CNY and CNH). Overall, I think china will prefer to do managed big deal one-on-one with other countries. This might not cover all of their trade but probably a large (50%+) of it.

sroussey• 2 years ago

It’s the beginning of the end. The end is always super slow, then suddenly fast.

ramesh313• 2 years ago

Freezing Russia's sovereign assets was far more consequential as it eroded the trust on the westerns financial system somehow.

How, exactly? We have spent the last two years building a watertight legal justification for doing so. Nothing was arbitrarily taken, and they are still earning interest on that balance. But if you break international law, you will face international legal consequences, under due process of the law that you agreed to abide by through taking part in our system.

roenxi4• 2 years ago

That is cool and all; but if the US is going to seize assets after building a watertight legal case then countries can't just by default leave their sovereign assets in places where the US can seize them. A country's bankers are not interested in taking that sort of risk needlessly, there needs to be something in it for them.

Of course the international finance system is complicated so maybe there still is enough of a payoff to holding US dollars, we're seeing something of an exploratory process here as China, Russia and probably India start testing the system. It might hold.

elzbardico24• 2 years ago

Well, you could be right and yet, the economic consequences would be the same. Contrary to what you say, the freezing of said assets and their confiscation is on legally murky waters, and even if it was clearly allowed by Charter of the United Nations, of course it would require a voting on the security council or at least on the general assembly not just a gentleman agreement between the NATO countries, bypassing the only real source of international law: the UN.

The thing is. Does it matter? Can the US and its partners really enforce it? How do you expect other countries that are not in the western club to react? As I said in other comments, we no longer live in the world where the US is the single biggest commercial partner of every country in the world, we don't live anymore in a world where the US alone is 40% of the global GDP. Those days are over.

csomar4• 2 years ago

There is no “international law”. It’s just some term western politicians made to give them legitimacy. The world also doesn’t care since all countries have border disputes and potential conflicts. Freezing/seizing the money is seen as a serious risk now.

pphysch2• 2 years ago

they know that they can't do a firesale of US bonds as it would obliterate a lot of their wealth.

Wealth and power are hard to distinguish at this scale. Suppose PRC were to a) instigate a global crash of USA Treasury assets and b) offer to swap USA debt for PRC debt for preferred clients. Rather than watch their UST holdings evaporate, most global wealth managers would take the deal. And then RMB does become #1 reserve currency overnight...

Yes it would be terribly "expensive" for PRC in nominal terms, but what is the price of global financial hegemony?

elzbardico24• 2 years ago

The price of financial global hegemony is the price paid by the US:

- Deindustrialization

- Massive Wealth Concentration

- A housing crisis due to asset inflation

- Unemployment and/or subemployment.

China is still a bit communist. The government rules their wall street, not the other way around.

csomar4• 2 years ago

China probably doesn’t want the RMB to become the world reserve currency. The advantages are not a free lunch. Look up the net investment position of the USA and how it degraded after 1970s. All these printed and circulating dollars are a debt to the “US economy”.

lossolo• 2 years ago

There is a deal under way to make sure that they will still use the USD and loosen their ties with China.

https://www.reuters.com/world/us-saudi-arabia-close-finalizi...

w4• 2 years ago

This just strikes me as sharp elbowed negotiation by the Saudis. I bet good odds that this particular story about the Saudi treaty expiring will have proven to be a nothingburger a year from now (even if de-dollarization and multi-polarity in general continues to be a story).

Archelaos• 2 years ago

Nobody is going to start frenetically doing oil business in Yuan just because this agreement has expired.

But the Europeans would prefer the Euro and the Japanese the Yen,[1] because it is beneficial for their own economies.

In the past period of energy price inflaction one could observe quite for awhile that the exchange rates favoured the US-dollar over the euro although inflation in the USA was higher than in the EU. The best explanation I came across for this phenomenon was the petrodollar: Importers from the EU needed to exchange a lot of euro into dollars to pay for oil. As a result, the exchange rate shifted increasingly against the euro, which made energy costs within the EU even more expensive, which gave the USA a competitive advantage.

Importing countries therefore have a great incentive to conduct oil transactions in their own currency. This will not lead to the dollar losing its supremacy in oil trading overnight. But I expect its share of trading volume to gradually decline.

[1] Some import figures of oil from Saudi Arabia from 2022 for context: EU 25.8B US$ and Japan 39.8B US$, which together was almost the same as China 65.0B US$. (However, the figures fluctuate considerably from year to year.) Source: https://tradingeconomics.com/european-union/imports/saudi-ar... https://tradingeconomics.com/japan/imports/saudi-arabia/crud... https://tradingeconomics.com/china/imports/saudi-arabia/crud...

Dalewyn4• 2 years ago

Things will keep running as today probably for the next 20 years.

If anything, this is another of many shots across the bow that Pax Americana is, in fact, on notice.

It's our (the west's) era to lose.

refurb• 2 years ago

The question I have is - what is the alternative currency to hold?

Yuan which is held to a fixed exchange rate that could change at any time? Not to mention the capital controls.

Euro? Yen? Australian dollar?

USD doesn’t have to have some special agreements to make it the safest currency to hold.

elzbardico24• 2 years ago

For now, and probably the next 20 years? I'd still bet on the dollar. Those changes are coming, but they will take decades.

bparsons• 2 years ago

This could have been a cataclysm 30 years ago, but the global energy picture has shifted a lot.

US/Canada produce way more oil and gas than Saudi Arabia and are now exporting significant amounts of energy.

With China now shrinking, we are likely somewhere around (or past) peak global gasoline demand, with strong, but slowly diminishing demand into the mid-2030s.

The Saudis will remain a supplier of cheap oil to their trading partners, but they are sitting atop an asset that can be thought of as a perishable good as the world moves toward greater electrification.

The size and shape of the global economy is very, very different than the 1970s. GE, GM, Aramco and Exxon have been replaced by Amazon, Google and NVIDIA. These companies are global juggernauts, and will ensure healthy demand for US currency well into the future.

dexzod• 2 years ago

I think this will have some interesting consequences. The US dollar used to be backed by gold, then Nixon ended that and then it got tied to oil, so in effect it was still backed by something tangible. The rest of the world currencies being somewhat linked to dollar were also indirectly tied to oil. Now the dollar is backed by nothing and by extension the rest of the currencies. In that sense dollar is now just a digital currency.

advisedwang• 2 years ago

The price of oil varies, so the petrodollar is nothing like the gold standard, where a dollar was pegged to a specific amount of gold.

fuzzfactor• 2 years ago

I would say you're both correct.

the petrodollar is nothing like the gold standard, where a dollar was pegged to a specific amount of gold.
in effect it was still backed by something tangible.

I expect for the foreseeable future, with a few hundred dollars you will still be able to drive your Corvette (or other pleasure craft) around for quite a pleasurable tour.

The thing that changes is the number of miles you can go according to the present asset value of your fuel at any one time.

People got accustomed to that part of it a long time ago, after Nixon sacrificed the currency to the Saudis.

With complete discharge as a petrocurrency, that could end up with some place other than the US, one which average income is abysmal by comparison, being fully able to collectively purchase more Corvettes for cash than Americans because of debt levels relative to tangible assets.

highwayman47• 2 years ago

Surprised to see TipRanks on HN. That's not a real news source.

treebeard9012• 2 years ago

Expect the U.S. Dollar to lose reserve currency status faster than expected to the Yuan. This can be seen in the Treasury market and with other nations going around sanctions or avoiding future sanctions.

For a petrodollar specifically, or petroyuan in the future, the idea could be that the largest manufacturer is going to be the largest consumer of energy for manufacturing. In the past this was the United States which is why the Saudi petrodollar, while overhyped, made sense after the Nixon shock.

China has played a key role using its increasingly gold backed currency to settle transactions for sanction reasons and is expanding it to others.

It will take time for this change to happen and before long it will be interesting what kind of result this has on funding U.S. Govt debt, if more business is done in yuan than the dollar. All it will take is China loosening controls.

The other reason the dollar has been so resilient has been the U.S. Navy providing the backbone to defense agreements. Now China also has a comparable number of ships that will move out of the South China Sea and play an international role with a yuan reserve currency, this advantage isnt what it used to be.

hylaride2• 2 years ago

If China was a rule of law country without capital controls you’d be right, but nobody is rushing. Yuans are worthless unless you want to buy goods in China and if you amass too much, the Chinese government can control how it’s used without much recourse. This is a country whose government banned Winnie the Poo on social media because somebody started a meme of Poo and Tigger walking next to a photo of Obama and Xi walking.

The only real alternatives today are the Euro and to a lesser extent the Japanese Yen, and they have their own issues (in particular, the Eurobond market is fragmented between its member states and while the EU does issue its own bonds, it’s not institutionally or politically designed to issue at massive levels). Even Russia, which tried to bypass sanctions and sell oil direct to India was left with either collecting in rupees (that it couldn’t really spend much of) or in rubles (which India had a hard time finding a market to trade rupees for).

But again, don’t underestimate the basics of recourse in rule of law. You can own shit tons of US Treasuries and still speak ill of or go against the US government or its leaders. Do you think Saudi Arabia or anybody else wants have to bend the knee to anybody else?

rmbyrro• 2 years ago

without much recourse

If you mean crying is a recourse, otherwise this is an understatement.

There's no recourse.

treebeard9012• 2 years ago

Russia is doing quite well getting around the dollar. Others are following their lead.

You are likely correct in other parts of your reply. Only time will tell. I think the trending direction is clear...

Also, rule of law in the U.S. just isn't what it used to be. Many other countries have seen what the U.S. has done with Russian money kept in Western banks.

nradov3• 2 years ago

This is nonsense. China's gold holdings stand at about 0.3% of their currency supply. "Gold backed" my ass.

China is working hard to build an effective blue-water navy. They'll probably accomplish it eventually but for now they have virtually zero power projection or expeditionary capability. They struggle to even sustain a small surface action group in the Middle East.

avsteele• 2 years ago

So is this real or not? I can't find any article actually naming the 'agreement'

neilwilson• 2 years ago

Something being priced in dollars, doesn't mean it is bought with dollars.

Oil has been bought in every currency on the planet for a very long time.

The dollar clearing system is a transit route, not necessarily a destination. Buyers buys things with the currency they have, and sellers end up holding the currency they want to hold. Those involved in FX make a turn causing that match to happen. Otherwise the transaction never happens in the first place.

The expiration of the agreement merely means that Saudi now has the option to move its oil retained profits out of US Treasuries and into something else, which may very slightly affect the yield curve.

ble• 2 years ago

Seems like a source that one should not generally take seriously (Tipranks) being syndicated by a source associated with an important name (Nasdaq) as part of a larger wave of articles about how some "pact", "treaty", or "contract" ended on a specific day.

Having done a little more digging, I could find lots and lots of pieces about this topic, but I could not even one coming from a recognizable journalistic source. (Far from the top of search results was a piece that seemed to have some value: it noted the wave of coverage of the purported end of this pact despite the fact that no such pact existed. It also identified a possible connection between pushing this story, which makes the dollar sound endangered, and attempting to promote cryptocurrency.)

Lots of HN commenters taking this at face value. To me, the overall situation looks like an object lesson in basic critical media literacy.

JumpCrisscross30• 2 years ago

Lots of HN commenters taking this at face value

It's monetary policy, international finance and geopolitics. Famous HN fortes.

(For the avoidance of doubt, only one of those is even remotely something I have competence in.)

photochemsyn• 2 years ago

As far as I know there is no formal petrodollar recycling pact between the United States and Saudi Arabia, nor any termination of the underlying understanding, which is that most of the dollars flowing into the oil states in the Gulf get reinvested back into US and British (and European) economies, and into the IMF and similar entities, in the names of the oil states.

There are a lot of diplomatic cables from the 1970s about the origins of the concept (petrodollar recycling), but fundamentally it was that the Gulf Arab states had few options about where to put their oil money, and so most of it went back to western banks and international loan programs or into expensive property investments and financing Uber by at least $3.5B and so on. In exchange, they get their security guaranteed by US military and economic power. See [1] for a fascinating and well-written history of the period when the deal was implemented.

However, it does seem Iran under the Shah was the first big petrodollar recycler, and he'd already invested a billion dollars each in Britain and France by 1974, which is part of why the Iranian revolution came as such a shock in Washington (and also accounting for the U.S. and Britain and France and Germany pouring material support and loans into Saddam's regime in Iraq as he went to war to seize Iranian oilfields in the early 1980s).

Regardless there's no formal pact I've ever heard of on this, it's more some kind of diplomatic agreement, possibly enforced by the threat of freezing assets for various reasons real or pretend. The problem now is, what if the Gulf states decide they want to put those reserves into big domestic infrastructure projects? what if a majority of contracts going to Chinese firms, who seem better at large-scale solar PV and high-speed trains than the US or Europe does? Will Uber rates have to go up?

[1] "The Oil Kings: How the U.S., Iran, and Saudi Arabia Changed the Balance of Power in the Middle East" by Andrew Scott Cooper.

happyjack• 2 years ago

I worked in oil / gas on international projects for 10ish years.

I think the dollar will still be the de-facto reserve currency in 20 years, but it will be more as a medium of exchange rather than a true "reserve" currency for central banks. Central banks are buying gold like crazy.

Comparatively speaking, the dollar is pretty stable. But, the inflation genie is out of the bottle. The USA keeps deficit spending like there's no tomorrow, and is on an unsustainable path. If tax receipts don't increase, we will have to print our way to debt servicing.

Also, the western global hegemony is shifting. Many non aligned countries frankly don't care about the wests causes; they simply want cheap energy and to grow themselves out of poverty. The middle east is facilitating all this for southeast asia and the like.

TL;DR the dollar will remain, but it will be an intermediary exchange between currencies and not a real "reserve" store of wealth.

janandonly2• 2 years ago

There is no pact that ends. There is a non binding gentleman’s agreement. Never put on paper and never enforced.

U.S.-Saudi petrodollar pact ends after 50 years

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