The end of the petrodollar marks a major shift in the financial world order
The termination of the petrodollar agreement is undoubtedly an important turning point in the global financial landscape. This mechanism, which has been in place for nearly 50 years, has propagated the dollar as an international reserve currency and underpinned the financial hegemony of the United States.
In the 70s of the last century, the United States reached an agreement with Saudi Arabia that oil transactions must be settled in dollars. This agreement not only stabilized the global demand for the dollar, but also cemented the dominance of the United States in the international financial system. However, Saudi Arabia's recent decision indicates that the absolute position of the dollar in the global monetary system is gradually weakening.
In recent years, with the rise of emerging economies and changes in the geopolitical landscape, multipolarization has become an inevitable trend. Countries such as China and Russia have actively promoted the internationalization of their currencies in an attempt to weaken the dominance of the dollar.
This change did not happen overnight, but was the result of years of hard work and growing economic power. In particular, China, the world's second-largest economy, has begun to bear fruit in the internationalization of its renminbi. By establishing a cross-border payment system (CIPS) and signing currency swap agreements with many countries, China is gradually shaking the global hegemony of the US dollar.
At the same time, the rise of digital currencies has also had an impact on the position of the dollar. The global popularity of decentralized digital currencies such as Bitcoin, as well as the development and application of central bank digital currencies (CBDCs) in various countries, are gradually changing the landscape of international payment and reserve systems. In particular, China's digital yuan pilot project has made significant progress at home and abroad. The emergence of these emerging technologies and forms of money not only challenges the traditional financial system, but also poses a threat to the global standing of the US dollar.
The United States must adapt to this new world financial order, or its global influence will be much less than it once was. Faced with the collapse of the petrodollar system, the United States needs to reassess and adjust its monetary policy and international strategy. Continued reliance on dollar hegemony is no longer realistic, and the United States must seek a new balance in the international financial arena. Otherwise, its dominance and economic interests in global affairs will inevitably be weakened.
The Saudi decision symbolizes the end of an era, while also revealing the profound transformation that the global financial system is undergoing. This is not only a shake in the hegemony of the dollar, but also a reshaping of the global financial order. Developments in the coming years will determine which countries and currencies will be able to dominate the new order. The future of the financial world is uncertain as countries around the world continue to battle currencies, technologies, and geopolitics.
What will be the impact on the U.S. economy and position after the end of the petrodollar?
Once the petrodollar is over, the United States will face a huge shock on several fronts. The cornerstone that once underpinned America's economic and financial hegemony is now crumbling, triggering a chain reaction.
First, international demand for the dollar will decline, and its status as a reserve currency will be weakened. For a long time, the world has needed to buy oil in dollars, resulting in a persistent demand for dollars. This demand not only stabilizes the dollar's global position, but also strengthens the US advantage in the international financial system.
However, once oil transactions are no longer settled in dollars, the global demand for dollars will be significantly reduced. Imagine how hard it would be for a restaurant that is used to being full every day to suddenly have customers leave. In the same way, the dominance of the dollar will no longer exist, which is not only a huge change in financial markets, but also a major challenge to the very foundations of the US economy.
Second, the U.S. advantage of low-cost borrowing will disappear. For a long time, the United States could rely on Saudi Arabia and other oil exporters to buy U.S. bonds, which used oil revenues to buy large amounts of U.S. Treasury bonds to help keep borrowing costs low. However, with the disintegration of the petrodollar system, these flows will gradually decrease.
Without these "big" buyers, the cost of borrowing in the United States will inevitably rise. Imagine a family that suddenly loses its most reliable source of income and will face financial stress and difficulty in borrowing money next. Similarly, the U.S. fiscal deficit will face higher financing costs, which will undoubtedly be a huge test of U.S. fiscal policy.
Third, the economic influence of the United States will decline. The power to control global energy pricing has historically been an important lever for the United States to influence the economies and politics of other countries. Once this advantage is lost, the United States' voice in international affairs will also be weakened. Through the petrodollar system, the United States has not only benefited economically, but also occupied the commanding heights geopolitically. Now, the end of this system means that the United States will lose control of the global energy market. This is not only a decline in economic influence, but also a serious challenge to its global hegemony.
Finally, the repatriation of the dollar will be reduced, and the US financial market will be under pressure. The repatriation of oil revenues to the United States was once an important force supporting the U.S. stock market and financial system. Once the petrodollar system collapses, this part of the money will be significantly reduced.
U.S. financial markets will be under pressure to reduce funds, which could lead to capital outflows. Imagine a pond full of water that is suddenly cut off from its water source and the water level will drop rapidly. Similarly, the U.S. financial market will also face the dilemma of a capital crunch, and the impact on the U.S. stock market and the economy as a whole will be obvious.
The end of the petrodollar is not only a change in the monetary system, but also a reshaping of the global financial order. The U.S. economy and its international standing will face unprecedented challenges. However, this is only the beginning of the story.
After the end of the petrodollar, how will other currencies and energy pricing mechanisms change?
The end of the petrodollar era not only means that the dollar's position in the global financial system is being challenged, but also that other currencies will play a greater role in international energy trade. Shifts in global economic forces will reshape the rules of trading and create more diversified and complex energy pricing mechanisms.
First, as the EU rises, the euro is expected to further internationalize and compete with the dollar. For a long time, the euro has been inferior to the dollar in international trade and reserves, but its economic size and geopolitical influence should not be underestimated. The ECB and EU member states continue to promote the use of the euro in international markets, especially in energy trade.
As a simple example, if oil-producing countries start accepting the euro as a means of payment, this will greatly increase the international status and demand for the euro. As an important global energy consumption market, Europe's efforts to promote the internationalization of the euro will certainly pose a strong challenge to the existing dollar system.
At the same time, China's internationalization of the renminbi is accelerating. As the world's second-largest economy, China's influence in international trade continues to grow. China is actively promoting the use of the renminbi in the international market by establishing a cross-border payment system (CIPS), signing currency swap agreements with many countries, and promoting the Belt and Road Initiative.
Especially in the Asian region, as China's economic power rises, the use of the renminbi in the region is bound to increase. Imagine if major energy transactions in the Asia-Pacific region started to settle in RMB, which would have a profound impact on the dominance of the US dollar and drive global acceptance of the RMB.
The emerging digital currency will also impact the dollar's dominance in energy trade due to its decentralized nature. The global popularity of decentralized digital currencies such as Bitcoin in recent years has challenged the traditional monetary system like never before. Central banks are also researching and launching their own digital currencies (CBDCs).
For example, China's digital yuan pilot program has made significant progress at home and abroad. The decentralization and efficiency of digital currencies make their applications in international trade promising. If energy trading is settled in digital currencies in the future, it will revolutionize the existing financial and trading system.
At the same time, regional institutions dominated by emerging economies, such as the BRICS, will push for more diversified energy pricing models. The BRICS countries include Brazil, Russia, India, China, and South Africa, and their growing economic power and market demand are pushing them to play a greater role in the international economic arena.
The BRICS is actively exploring new energy pricing mechanisms, which may include a pricing model linked to the currency of trade, or a basket of currencies. The rise of these emerging economies will weaken the influence of the Organization of the Petroleum Exporting Countries (OPEC), and countries will consider their own interests more in energy pricing than the constraints of a single monetary system.
Generally speaking, the global financial order is gradually transitioning to multipolarity, and countries need to adapt to this trend as soon as possible to reduce volatility and uncertainty during the transition period. The future of energy pricing will be more complex and diverse, and will no longer be dominated by a single currency. This transformation not only affects the global trade pattern, but also poses new challenges to the economic policies and strategic layout of various countries. Countries need to be actively involved in the development of new rules to ensure a favorable position in the new international order.