In June 2024, news of the US-Saudi Arabia petrodollar deal expiring after 50 years went viral and within weeks, the US stock market suffered. Reports now claim that there was never such agreement in the first place (Morningstar[1], July 17th, 2024). The premise of said agreement was that Saudi Arabia would price its crude oil exports in US dollars and use proceeds to purchase US Treasury bonds. In exchange, the United States would give the kingdom military aid and equipment. Under said arrangement, Saudi Arabia secured its economic and general security while the United States gained a reliable supply of oil and a captive market for its debt.
Whether there was an official agreement or not, the petrodollar system has been a cornerstone of the global economic order since the 1970s when oil-exporting countries had priced oil exclusively in US dollars to the benefit of the greenback as the preferred global reserve currency. However, the immediate effects on US dollar hegemony would be affected if Saudi Arabia openly considered pricing oil sales in other currencies[2], since oil still drives the modern industrialised economy despite efforts to shift towards renewables. Shifting away from the dollar could influence the dynamics of international trade agreements, affect other commodity markets, and challenge global financial stability.
Global Consequences of as Saudi Accepts Multi-Currencies for its Oil
The potential end of the petrodollar – simply referring to oil priced in US dollars – could have significant consequences for the global economy, including Singapore, because surplus oil exporters who are paid in dollars will recycle them through US Treasury bond purchases, thus helping to finance US trade deficits. Here’s an analysis of the possible impacts and implications:
US Dollar Depreciation
The US dollar may depreciate if nations that export oil begin to accept other currencies in exchange for the commodity. This would drastically reduce the demand for the US dollar worldwide. Since the value of their reserves would decline, nations with sizable US dollar reserves would be severely impacted by this depreciation. This could cause economies that rely heavily on the strength of the dollar to become unstable.
Increased Currency Volatility
Ending the petrodollar system may cause significant volatility in currency markets. Exchange rates may become more erratic as nations and companies adopt new payment methods and protect themselves against currency risks. Economic instability could result from this volatility’s disruption of global investment and trade.
Higher Transaction Costs
As currency conversion and exchange rate hedging are required, conducting oil trade in multiple currencies may result in higher transaction costs. Businesses engaged in international trade and finance would see a decline in profitability as a result of these additional expenses.
Impact on US Influence
Given that the US’s global economic dominance has been built on the petrodollar system, its geopolitical influence may decline because of its demise. If the US dollar’s influence in the world’s oil trade declines, other major economies, such as China and the European Union, may gain more economic clout.
Status as the Preferred Reserve Currency
The fact that oil is priced in US dollars alone has an importance that goes beyond the domains of finance and oil. The agreement strengthened the position of the dollar as the global reserve currency by requiring oil sales to be made in US dollars. The American economy has been significantly impacted by this as well. Because of the continued strength of the dollar due to the global demand for dollars to buy oil, imports are still reasonably priced for American consumers. A strong bond market and low interest rates have also been bolstered by the inflow of foreign capital into US Treasury bonds.
However, if the oil market diverges from the US dollar, this demand might decline and affect the US economy. This change emphasises how crucial it is to diversify currency holdings internationally to lessen dependency on the US dollar.
Oil Market Stability
Moving away from the petrodollar might lead to temporary volatility in the oil market while new trade agreements and pricing schemes are developed. This volatility could cause swings in oil prices, which would impact economies that rely on oil imports and the world’s energy markets.
Geopolitical Shifts
Alternative currencies in oil trading have been supported by nations like China and Russia, and if they are successful, this could increase their geopolitical influence at the expense of the US. This shift may result in the creation of new oil trade-based political and economic coalitions, which would reorganise the world’s power structures. By utilising their solid diplomatic ties and cultivating relationships with emerging powers, nations must navigate these shifting dynamics. This development is mostly due to the changing power dynamics in the oil market.
In addition, the world’s dependency on oil has decreased with the rise of alternative energy sources like natural gas and renewables. Furthermore, the conventional dominance of the Middle East has been challenged by the rise of new oil-producing countries like Canada and Brazil.
Financial Markets
As the demand for the dollar declines globally, the value of assets denominated in dollars may also fall, which would affect global reserves held in dollars as well as US Treasury bonds. The adoption of new currencies in oil trading would require financial institutions across the globe to modify their operational procedures, which could lead to increased transaction costs and complexity. To respond to these developments, Singapore can provide comprehensive currency management services and ensure the smooth integration of new currencies in trade and finance. Hence, the global financial sector must be more adept and flexible.
Implications for Singapore
Economic and Trade Impacts
Singapore is a major hub for international trade, so the possible demise of the petrodollar system could have a big impact here. Due to the need for regular currency conversions and exchange rate hedging, the shift to multiple currencies in the global oil trade could result in higher levels of currency volatility and increased transaction costs. To manage the risks involved, this environment may disturb the established trade patterns and call for more complex financial strategies. Due to its extensive integration into international trade networks, Singapore’s economy would need to change by diversifying its foreign exchange reserves. To protect against US dollar fluctuations, this diversification could entail holding larger quantities of other major currencies and possibly precious metals like gold. The country’s strategic location and robust infrastructure can serve as assets in navigating these changes, ensuring it remains a vital node in global commerce despite potential disruptions.
Financial Services Sector
The depreciation of the petrodollar may present opportunities as well as challenges for Singapore’s financial services industry, which is already a world leader in financial intermediation and currency trading. The need for financial services linked to currency risk management would probably rise due to the shift to multi-currency oil transactions. The innovative and efficient banks and financial institutions in Singapore could increase the range of services they offer to meet this expanding demand, further solidifying Singapore’s position as a leading financial hub. Furthermore, as companies look for a sophisticated and stable environment for managing intricate multi-currency operations, this scenario may draw more financial activities to Singapore. Singapore can take advantage of possible market volatility to grow its financial services sector by building on its current strengths and improving its financial infrastructure.
Investment Flows
Capital flows may be significantly impacted by the potential global economic realignment that would come with the demise of the petrodollar. With its strong regulatory framework and stable political climate, Singapore may grow in popularity as a place to invest. Singapore may be the ideal place for investors to place their money if they are searching for safe havens in a more dispersed global monetary system. This flood of capital has the potential to boost the economy in many areas, encouraging innovation and growth. However, to realise this potential to the fullest, Singapore would have to keep improving its investment climate by upholding high governance standards, efficiency, and transparency. Furthermore, creating new financial services and products to meet the demands of foreign investors may increase Singapore’s attractiveness as a global financial hub.
Energy Prices and Supply Chains
Going beyond the petrodollar system will inevitably result in changes to supply chains as well as fluctuations in the price of energy globally. These changes could present serious risks to Singapore’s economy, which has a significant maritime sector and high energy consumption. The costs of production and transportation can be impacted by fluctuating energy prices, which can harm Singaporean businesses’ ability to compete. Singapore might make greater investments in renewable energy sources to lessen its reliance on imported fossil fuels and reduce these risks. Moreover, increasing energy efficiency in all sectors of the economy would save expenses and promote environmental sustainability. In the face of changes in the global energy market, Singapore can protect its economic stability and foster sustainable growth by proactively modifying its energy policies and infrastructure.
Geopolitical Positioning
With the end of the petrodollar, Singapore will need to use its well-known diplomatic dexterity to navigate a changing geopolitical landscape. To preserve its strategic advantages, Singapore needs to carefully balance its relationships as the influence of major powers like the US and China changes. It will be essential to actively participate in international organisations and fortify relationships with important oil-exporting countries. Singapore’s standing on the international scene may be improved by its capacity to cooperate and mediate on international financial and economic issues. Through the utilisation of its advantageous geographic position and diplomatic connections, Singapore can maintain its crucial role in establishing a stable and all-encompassing global financial framework. By taking the initiative, Singapore will be able to manage the risks and take advantage of the opportunities brought about by the move away from the petrodollar.
Strategic Considerations for Singapore
Singapore must strategically position itself to navigate these changes to ensure its continued economic stability and growth. By diversifying currency reserves, strengthening financial infrastructure, adapting energy policies, and leveraging diplomatic relations, it can proactively mitigate risks associated with these global financial shifts.
Diversifying the Economy and Enhancing Resilience
Prioritising resilience and economic diversification is crucial for Singapore, given the possibility of the petrodollar system collapsing. It is imperative that its economy be diversified beyond conventional industries like trade and finance. Through promoting expansion in developing sectors such as green energy, technology, and advanced manufacturing, Singapore can lessen its reliance on external economic shocks. To open up new growth opportunities, innovation and entrepreneurship must be promoted. Singapore should also strengthen its economic buffers, such as keeping sizeable foreign exchange reserves and creating strategic inventories of necessities, in order to increase its resilience. By taking these steps, Singapore will be better equipped to weather economic shocks and preserve stability in a world that is becoming increasingly unstable. Furthermore, Singapore may decide to increase its holdings of gold and other major currencies to reduce the risks related to US dollar depreciation.
Strengthening Financial Infrastructure
Singapore must improve its financial infrastructure to stay competitive and take advantage of the shifting global financial landscape. This entails investing in cutting-edge financial technologies, fortifying regulatory frameworks, and fostering efficiency and transparency in the financial system. Financial institutions in Singapore ought to enhance their competencies in domains such as multi-currency transactions, blockchain technology, and currency risk management. By doing this, Singapore can draw in more foreign financial activity and solidify its status as the world’s preeminent financial centre. Furthermore, to establish international standards and guarantee the stability of the financial system, cooperation with regulatory agencies and international financial centers will be essential.
Energy Policy Adaptation
A diversified energy supply and investments in renewable energy would help Singapore reduce the risks brought on by fluctuations in the oil market. Singapore ought to expedite its shift towards renewable energy to alleviate the potential hazards linked to worldwide energy price volatility. Energy security will be improved and reliance on imported fossil fuels will be decreased by making investments in solar, wind, and other renewable energy sources. To increase energy efficiency and dependability, Singapore can also investigate developments in energy storage and smart grid technologies. It will be essential to encourage public and private investments in green technologies and to promote sustainable practices across industries. Singapore can establish itself as a clean energy hub in the region and draw investments in green technology by spearheading the adoption of renewable energy, thereby promoting long-term economic sustainability.
Leveraging Diplomatic Relations
Strategic diplomatic agility is necessary for Singapore to navigate the changing geopolitical landscape. It will be crucial to continue taking a balanced stance in its dealings with superpowers like the US, China, and the EU. Singapore should keep up its vigorous advocacy for a secure and inclusive global financial system in international organisations and forums. It will also be crucial to form partnerships with major oil-exporting nations and take part in international energy discussions. Additionally, Singapore can position itself as a mediator in regional and international conflicts by utilising its advantageous location and well-established reputation for neutrality. Singapore can protect its interests and increase its geopolitical influence by pursuing a proactive and well-balanced diplomatic strategy.
Conclusion
All things considered, the end of the petrodollar system would represent a dramatic change in the political and economic climate of the world, with far-reaching and intricate effects on a variety of industries and geographical areas. The demise of the petrodollar could bring difficulties, but it also gives Singapore a chance to further establish itself as a flexible and resilient global financial hub. Singapore can effectively navigate the transition by taking proactive measures to manage risks and capitalise on emerging opportunities.
1https://www.morningstar.com/news/marketwatch/2024061751/reports-of-the-petrodollar-systems-demise-are-fake-news-heres-why
2 https://www.wsj.com/articles/saudi-arabia-considers-accepting-yuan-instead-of-dollars-for-chinese-oil-sales-11647351541
Dr Hazik Mohamed is a multi-skilled professional, whose focus is on business growth strategies for start-ups, tech-related research, and various consulting projects. His past corporate clients include the ASEAN Secretariat, national finance offices, and the United Nations Capital Development Fund. He is also the author of three internationally published books: Belief and Rule-Compliance (Academic Press, 2018), Blockchain, Fintech and Islamic Finance (De Gruyter, 2019) and Beyond Fintech (World Scientific, 2021).
