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    Petrodollar, it's alive & flowing

    Synopsis

    Reports of demise of the dollar as a reserve currency due to Saudi Arabia potentially pricing oil in other currencies are exaggerated. The 'petrodollar agreement' between the US and Saudi Arabia is not confirmed, possibly not existing since 1974.

    Petrodollar, It’s Alive & Flowing
    Reports of demise of the dollar as a reserve currency, because Saudi Arabia may price oil in other currencies, to quote Queen Victoria upon hearing the news of her own supposed demise, are exaggerated. For starters, the end to the so-called 'petrodollar agreement' between the US and Saudi Arabia this month has not been confirmed by official sources. Possibly because there may not have been an iron-clad agreement, supposedly inked in 1974, in the first place. It could have evolved out of a need for Saudi Arabia to deploy the surplus it was earning from oil sales and US efforts to push its industrial exports in the kingdom. The arrangement has worked well all these years. But times have changed with new buyers, such as China and India, seeking to buy oil in their local currencies. Those efforts may bear fruit. However, it does not change the fundamentals of the oil market.

    Big buyers have some bargaining power in the kingdom over choice of currency. But Riyadh remains the strongest strategic ally of Washington in the Arab world. It will need dollars to buy arms from the US. China holds nearly 10 times as much dollar reserves as Saudi Arabia, and it has not been able to make a serious dent on the dollar's role as reserve currency. Finally, the trade in oil uses dollars in just about everything, from buying to transport to insurance. This is not going to change even if Saudi Arabia begins to sell oil against the yuan.

    The oil trade is done in dollars because it keeps things simple. India's experience with buying Russian oil in local currency is a case in point. Moscow has a worry over the surplus it is accumulating, which can either be used for inward investment or for lending to India. Neither option is as desirable as selling oil in dollars and using those proceeds at will. Riyadh may see some benefit in using oil to pay for Chinese exports. However, it can do that even now with dollars. The oil industry is not likely to question the dominance of the dollar as the medium for trade.

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