How a Saudi pullback from a landmark US deal is bad news for dollar dominance

• Saudi Arabia has not renewed a deal that ensures the use of US dollars in the oil trade.
• The end of this "petrodollar" agreement will dent dollar dominance, the Atlantic Council wrote.
• The kingdom is instead seeking to diversify its trade as alternative markets crop up.

The end of a watershed trading agreement between the US and Saudi Arabia is a hit to the dollar's oil market supremacy, offering a symbolic win for de-dollarization, the Atlantic Council said.

This month, Saudi Arabia did not renew a 1974 accord that mandates the exclusive use of greenbacks when selling its crude oil. For fifty years, the "petrodollar" deal has ensured the dollar's role as the world's chief financing and trading currency, the think tank said.

"Saudi Arabia's decision to scrap the petrodollar and diversify the currencies used in selling its oil aligns with a larger strategy to expand the focus of its international relations beyond the US and Europe," nonresident senior fellow Hung Tran wrote, adding: "But the petrodollar agreement's end also fits into a broader geopolitical context of declining US economic influence."

As uncertainty rocked the US economy in the 1970s, the petrodollar provided a way to keep the dollar stable. In exchange for security guarantees and military supplies, part of the agreement with Saudi Arabia saw that traded greenbacks were recycled into US bonds, deepening the dollar's role as a reserve currency.

But since the deal's origins fifty years ago, much has changed, Tran said.

American economic dominance is no longer as stark, with its share of world GDP falling from 40% to 25% since 1960. What's more, US dependence on Saudi oil has slid considerably, given a historic explosion in US domestic production.

Instead, alternative markets have sprung up, incentivizing crude economies to rethink their trading practices.

"China has become Saudi Arabia's largest oil customer, accounting for more than 20% of the kingdom's oil exports. Beijing has established close, trade-driven relationships throughout the Middle East, where US influence has waned," Tran wrote.

For this reason, Riyadh has gradually aligned itself with the de-dollarization movement, which seeks to lower the greenback's dominance of world finance.

For instance, the kingdom is among potential BRICS candidates, an economic bloc that has become one of the leading voices against the dollar. It's also linked with China to help establish mBridge, a cross-border payments system that uses central bank digital currencies.

If such payment ecosystems make ground, it's a real threat to US Treasury liquidity, risking a key pillar of the greenback's international position, Tran said.

"In such a world, the dollar would remain prominent but without its outsized clout, complemented by currencies such as the Chinese renminbi, the euro, and the Japanese yen in a way that's commensurate with the international footprint of their economies," he said.

Tran concluded: "In this context, Saudi Arabia's decision to end the petrodollar may be as much a harbinger of the financial future to come as its creation was fifty years prior."