Arabian Post Staff -Dubai
A potential security deal between the United States and Saudi Arabia is raising eyebrows in the financial world, with some analysts suggesting it could significantly impact the future of the petrodollar. The dollar’s status as the world’s dominant reserve currency hinges in part on its continued use in oil transactions, and a shift by Saudi Arabia, the world’s top oil exporter, could trigger a domino effect.
Last week, reports surfaced that a key agreement between the US and Saudi Arabia, underpinning the petrodollar system, had expired. This fuelled speculation that the kingdom might abandon the dollar altogether for oil sales. The Saudi riyal’s current peg to the dollar adds another layer of complexity. While Abu Dhabi Commercial Bank, a major lender in the United Arab Emirates, expects the peg to hold in the near to medium term, long-term forecasts are murkier.
The possibility of a US-Saudi security deal emerges against this backdrop. According to a Wall Street Journal report citing official sources, the Biden administration is finalizing such an agreement. The details remain under wraps, but experts believe a comprehensive deal could solidify Saudi Arabia’s commitment to the dollar. This would be a major win for the US, not just in terms of security cooperation, but also for the continued dominance of the petrodollar.
The potential benefits for Saudi Arabia are also significant. A security pact would bolster the kingdom’s military defenses, particularly in the face of regional threats from Iran. The US has long been a major supplier of weapons to Saudi Arabia, and a formal agreement would likely solidify this relationship. Additionally, the deal could serve as a shield against criticism of the kingdom’s human rights record, a contentious issue that has strained relations with the US in recent years.
However, the path to a US-Saudi security deal is not without hurdles. Congressional approval is likely to be a sticking point, with some lawmakers expressing reservations about the sale of arms to Saudi Arabia. The human rights issue could also resurface as a major point of contention.
The impact of a US-Saudi security deal on the global oil market is difficult to predict. China’s recent efforts to ramp up oil production could complicate matters. If China succeeds in reaching peak production levels, it could challenge the US-Saudi dominance in the oil market. Additionally, the rise of the yuan as a global reserve currency could provide an alternative to the dollar, even if Saudi Arabia remains committed to dollar-denominated oil sales.
Despite these uncertainties, a US-Saudi security deal is still seen as a potential lifeline for the petrodollar. By reaffirming the close relationship between the two countries, it could shore up the dollar’s preeminent position in the global oil trade. However, the long-term future of the petrodollar will likely depend on a complex interplay of factors, including the evolution of the Chinese yuan and the geopolitical landscape of the oil market.
Also published on Medium.
