According to reports, Saudi Arabia chose to end the 50 year petrodollar agreement on June 9th, opting to sell oil in multiple currencies instead of just using the US dollar. Andy Schectman, President and CEO of Miles Franklin Precious Metals, has warned that if "oil" is stripped from the "dollar," the dollar will be "penniless," which could lead to "catastrophic" consequences.

Schectman stated that although Saudi Arabia has not officially confirmed that it is abandoning the so-called petrodollar, this marks a significant change in global economic dynamics that could have far-reaching implications for the dominant position of the US dollar in international trade.

Schectman said, "There are far more US dollar reserves outside the United States than inside the United States, and the reserves of US dollars are mainly for oil." He said, "As these dollars return to the country and are sold to the issuing country - because no one is willing to hold them anymore because they are no longer necessary for buying oil - the inflation rate will continue to rise. As these currency units are added to the monetary base, it will raise interest rates

The basis of the petrodollar system is a 1974 agreement between Saudi Arabia and the United States. According to this agreement, Saudi Arabia agreed to exchange its petrodollars into US treasury bond in exchange for US security guarantees, thus establishing a strategic alliance that has had a significant impact on global politics for decades. By 1975, all OPEC member countries had agreed to price oil in US dollars and invest in US government bonds.

Schectman predicts that if the US dollar is no longer the primary payment option for oil, one consequence will be a significant surge in interest rates, and the situation in the United States will become quite chaotic.

He said, "If all of this happens at the same time, it will be catastrophic. It will be chaotic because the natural reaction to the global sell-off of the US dollar is hyperinflation. It will hit our shores in an inflationary tsunami. The US dollar will collapse, the stock market will collapse, the bond market will collapse, the banking system will collapse, insurance companies will collapse. Everything. This is a great reset

As countries choose to de dollarize, the global trend away from the dollar has been accelerating, which Schectman describes as logarithmic decay. Bit by bit, it's starting to erode these dollars. It hasn't evolved into a full-scale dumping yet, and I can see it will become like this at some point, "Schectman said.

Is the expiration of petrodollar trading fake news?

Despite reports that the petrodollar agreement is about to expire, some experts have called it a conspiracy theory, stating that Saudi Arabia has not formally agreed to price crude oil entirely in dollars.

Paul Donovan, Chief Economist of UBS Global Wealth Management, called the news that the petrodollar agreement was not renewed "fake news". He stated that the 1974 Joint Committee Agreement on Economic Cooperation between the United States and Saudi Arabia did not specify that only the US dollar could be used. Donovan believes that Saudi Arabia will continue to accept other currencies, such as the pound, in the year following the signing of the agreement.

However, Donovan did point out that the United States and Saudi Arabia reached a secret agreement at the end of 1974, promising the United States to provide military assistance and equipment in exchange for Saudi Arabia to invest billions of dollars from its oil sales in US treasury bond bonds.

Jeffrey Kleintop, Chief Global Investment Strategist at Charles Schwab&Co., also joined the debate, stating that the termination of the petrodollar agreement between the United States and Saudi Arabia is meaningless for three reasons: firstly, the global oil financing, insurance, and transportation systems are almost entirely based on the US dollar. Second, although oil can increasingly be traded or sold in other currencies, once Saudi Arabia receives proceeds, they may invest in assets denominated in US dollars (US treasury bond), rather than assets denominated in RMB or rupees. Thirdly, the amount of oil traded in futures is approximately 10 times that of physical delivery, and futures are dominated by the US dollar, "Kleintop said on social media.

Schectman added that those who say Saudi Arabia's decision to let the petrodollar agreement expire is a 'paper tiger' are wrong.

He said, 'When you see Saudi Arabia rejecting the invitation from the G7 and joining projects like mBridge, you will find that mBridge is a system that tests multiple central bank digital currencies for wholesale cross-border payments outside of the US dollar and SWIFT systems.'. If we think it doesn't matter, we will disappoint ourselves greatly

Schectman added that the US dollar is unlikely to be replaced by another system entirely based on legal tender. On the contrary, he predicts that funds supported by commodities will make a comeback.

Accelerated de dollarization

The practice of abandoning the use of the US dollar in international trade transactions is not new, but it has been accelerating, especially after the Western sanctions imposed on Russia following the Russia Ukraine war.

JPMorgan Chase estimates that by 2023, approximately 20% of global oil will be traded in non US dollars.

The latest development is that China sold a record $53.3 billion worth of US treasury bond bonds and institutional bonds in the first quarter, while increasing its gold reserves. Gold currently accounts for 4.9% of China's foreign exchange reserves, the highest level since at least 2015.

Meanwhile, according to the International Monetary Fund's official foreign exchange reserve currency composition (COFER) survey, the share of US dollar reserves held by central banks decreased to 58.4% in the fourth quarter of 2023. This is the lowest level since 1999.

In addition, with the new sanctions imposed by the United States on Russia, Russia has officially adopted the Chinese yuan as its main foreign exchange.

The role of the US dollar and the euro in the Russian market has been declining over the past two years. This is the result of trade shifting towards the East and settlement currencies being changed to rubles, Chinese yuan, and other friendly currencies. The exchange rate of the Chinese yuan against the ruble will set the trajectory for other currency pairs and serve as a reference point for market participants, "the Russian central bank said in a statement