this video is sponsored by incog. Use the link in the description below or code Bagel to get 60% off an annual subscription. Ladies and gentlemen, welcome to the plane bagle. I'm your host Richard coffin. We got the breaking news recently that massive oil exporter Saudi Arabia is ditching the US dollar. As you may know, the country is a key partner for the United States, not just in terms of trade but also in terms of defense. But these past few weeks, we've gotten the headline that on June 9th, Crown Prince Muhammad bin Salman failed to renew the 8-year-old, sorry, the 50-year-old Petro dollar agreement, the system where in Saudi Arabia sells oil in US dollar. And over the past few weeks, we've seen the news spread like wildfire with a number of articles, YouTubers, and even a local CNBC news outlet sharing the update around Crown Prince MBS canceling his US dollar subscription, with many touching on the narrative that this change signals the end of the Dollar's Global

dominance, and by extension, as the US faces fewer markets to export its inflation onto, the death of the dollar itself. But amid all the alarm around this, there is one key issue here, which is that none of it is seemingly true. Not just because it didn't happen, but because it couldn't have happened. You see, it is true that the US dollar has seen a bit of an erosion of its global dominance, and likewise, that Saudi Arabia is exploring the possibility of dealing with other currencies in selling its oil. But the thing is, there's no Petro-dollar agreement coming up for renewal here. In fact, according to UBS Global Wealth Management Chief Economist Paul Donovan, there never was a Petro-dollar agreement. So, clearly, a messy start to today's topic. And that's why I wanted to post this video to try as best as I can to smooth things out because when you actually read the June 8th, 1974 agreement that many of these articles are referencing, the details are very different than what's being suggested. And to be transparent, I've expressed

skepticism over the death of the dollar in the past. Uh, but my goal here isn't to argue that the US dollar will always maintain this level of global dominance. We may very well see in our lifetime that that changes. I'm still advocating myself that we switch to the Looney. Uh, which for my non-Canadian viewers is what we call our $1 coins because of the lonon net. Uh, not only because every dollar is backed by a Timmy's double-double, but maybe the Goofy name lightens up geopolitical tensions. But while there's some truth that we're seeing changes in how countries treat currencies globally, uh, the issue with these stories isn't just the misinformation around the specific agreement around the petrol dollar. It's the overall misrepresentation that Saudi Arabia is on the verge of completely abandoning, uh, the greenback altogether. Because if you look at the details and the data involved here, it's not really feasible in the current state. Again, could be something that happens over

time not really feasible to suddenly ditch the dollar as some suggest. But let's start by giving some context and covering the basics. What's a Petro dollar? Well, the term really just refers to US Dollars that are earned by oil exporting countries. And the Petro dollar system refers to the fact that the vast majority of oil sold globally is priced in US dollars, with only roughly 20% of global oil sales involving other currencies. So, whether you buy oil in North America, Europe, or even Asia, you're likely going to need US dollars to make the purchase. And given how important oil is as a commodity for economic activity, you can see how this has, in a way, helped to cement the Dollar's Global dominance. And as is rightly pointed out, Saudi Arabia does play a role in supporting the system with its own sales of oil. You see, Saudi Arabia holds 17% of the world's proven petroleum reserves, making it the second largest holding behind only Venezuela. And as the single largest producer within OPEC, they naturally have

a lot of sway over the global oil market, so them switching to other currencies for the sale of oil does matter for the Petro dollar. And many have raised concerns that if the world were to move away from the US dollar, that the current economy in the country would collapse. The dollar would collapse, the stock market would collapse, the bond market would collapse, banking system would collapse. And there have already been anxieties about other countries exploring explicit alternatives to the US dollar, and even the recently announced embridge Central Bank digital currency project, which Saudi Arabia is a part of, which again is looking to set up an alternative system for trading. Which is probably why we saw these headlines about Saudi Arabia not renewing this agreement with the United States spread so rapidly. The story seemingly originated from some India-based Outlets and really caught like wildfire among crypto and Gold Online communities, with even gold company Kito spreading the misinformation. But regardless about how you feel about the Dollar's Global dominance or Fiat or the future of

monetary systems as we know it. The claim that Saudi Arabia has not renewed a Petrodollar agreement and is ditching the dollar is to frame it in the most generous light, not true. And the first point to support that is the fact that, again, there never was a Petrodollar agreement. This was something highlighted again by Paul Donovan at UBS, who released a note following the spreading of these headlines to emphasize that there never was a formal Petrodollar agreement. There is an agreement between the two countries that people seem to be referring to here, which was signed June 8th, 1974, and is titled Cooperation in the fields of Economics, Technology, Industry, and Defense, but it doesn't establish a Petrodollar system or in any way require Saudi Arabia to only sell in US Dollars. The agreement doesn't even contain the words Petro or oil. It simply establishes two joint commissions, one focused on economic cooperation and the other on modernizing Saudi Arabia's military. And you can see on later reports about the economics committee.

that there's no focus or goal for this group to establish a petrol dollar system. In fact, part of the reason we have this agreement in the first place is because at the time Saudi Arabia already had a bunch of US dollars from selling oil in US dollars. At the time, there was an embargo imposed on the US by OPEC that contributed to a surge in the commodities price. The US was motivated not just to improve relations with Saudi Arabia but to recycle the Petro dollars back into their economy via trade and investment. I'll leave a link in the description to the document down below if you want to check it out for yourself. It's interestingly not being sourced by many online articles, even the ones highlighting this as a fake story. It was a little tricky to find. It's in the Library of Congress's US Treaties and Other International Agreements, Volume 25, Part 3, Page 3,115. But the agreement itself is only six pages and says nothing about the Petro dollar. Now, Saudi

Arabia selling oil in US Dollars may exist as an informal agreement or understanding, and there is a chance that there is a hidden arrangement with Saudi Arabia. In fact, there was another agreement made not long after this first one, whereby America committed to buying oil and providing military aid and equipment to Saudi Arabia in exchange for the country investing its US Dollars into US treasuries. That agreement was actually kept secret until 2016 when Bloomberg submitted a Freedom of Information Act request for the details. So, it is possible there is another hidden Petro dollar arrangement, with some pointing to this hidden agreement as the Petro dollar agreement, and others pointing to a private meeting between President FDR and the Saudi Arabian king upon the USS Quincy back in 1945, almost 30 years earlier. But there's not much evidence that there's an explicit agreement here because, as again highlighted by Donovan, Saudi Arabia continued selling in Sterling after the 1970s agreement. Agreements Bloomberg, who were the ones who again made the Freedom of Information request, made no note of a

Petr dollar requirement in their exclusive story on the topic. And in 2023, a year before this supposed expiration of the supposed Petro dollar agreement, we saw the Saudi Arabia Finance Minister highlight that the country was open to trading in other currencies for their oil, something you probably wouldn't expect if they had a contractual obligation or agreement with the United States without some public push back, which might raise the question of if there's no formal agreement, why does Saudi Arabia sell or why did they ever agree to sell oil in US Dollars. Well, obviously, there are going to be some geopolitical considerations with their relationship uh with the United States, and the US did play a meaningful role in developing oil production in Saudi Arabia, with US companies and geologists helping to discover massive oil reserves in the country. But it's likely that a big contributor to this is simply inertia, uh, even back in 1975, the US dollar was already the dominant Reserve currency of the world, making up 78.6% of foreign reserves for all reporting countries. And because the US

dollar remains the dominant global currency. Today, it's simply just one of the easiest currencies to trade in. You think of it this way, a country that is selling oil doesn't necessarily want another country's currency, because those currencies will have limited uses. If Canada were to buy oil from Saudi Arabia and pay in Canadian dollars, sure, Saudi Arabia can turn around and then use that money to buy Canadian goods, but otherwise it's not all that handy. So in carrying out international trades, countries might either want A) their own currency, which might not necessarily be as common among foreign buyers, or B) they'll want another currency that has a lot of use cases, which internationally the US dollar is the best case of that. In fact, according to the Bank of International Settlements, half of global trade is invoiced in US Dollars and nearly 90% of global FX transactions involve the Greenback. Not to mention that US Dollars can be used for trading with the largest economy in the world, and given the country's perceived stability and military power, there's a

lot of international faith in the dollar, so much so that you actually see money flow into US dollars and treasuries, uh, from international buyers during times of turmoil. So you can see that even without an exclusivity Clause to only sell in US Dollars, there's a lot of reasons why a country might choose to sell in US Dollars versus accepting a bunch of other different currencies that don't have the same sort of network effect. So that's the first point. Saudi Arabia doesn't sell oil in US because it has to, but outside of geopolitical considerations, likely just because it's the most convenient. There is no Petrodollar agreement for Saudi Arabia to not renew. The second point worth highlighting is that even with the possibility of Saudi Arabia selling oil in non-US currencies, the country in general is just so incredibly far from possibly ditching the US dollar for a number of key reasons. Now here I want to highlight that it is true that Saudi Arabia's holdings of US treasuries are down from their peak, albeit they

recently, Rose to their highest level in three years to $132 billion, but the country's Financial assets are still primarily linked to the US dollar. With the drop in the country's US dollar reserves seemingly being in part due to the country simply parking its US Dollars into other riskier assets, which again makes sense given how much money they make in US dollars from the sale of their oil. They need a place to put that money to earn a return. The country still borrows quite a bit in US Dollars, with, according to Fitch, 45% of the country's outstanding debt Capital Market being denominated in US dollars, a share that's actually up from a year prior. So, to service and potentially pay off those debts, there's still going to be quite a lot of use for the incoming Petrodollars. But above all these points, is one really key detail that seems to be missing in this conversation, which is that the country's currency, the real, is pegged to the US dollar at roughly 26.7 cents. So, while that could change.

clearly, in the short term, there's no opportunity to really ditch the dollar without a severe economic impact, and they're going to have an economic interest in maintaining the relative value of the dollar. So hopefully, that demonstrates why these headlines about ditching the US dollar or otherwise canceling this agreement are, if not, uh, blatantly incorrect, are exaggerated or otherwise hyperbole. But with all that being said, I don't want to misrepresent the situation. There is evidence of the US dollar losing a bit of its market share as the global Reserve currency. As the IMF put in a recent blog post, the US dollar does continue to seed ground, uh, with the lost ground not being taken up by other dominant currencies but rather non-traditional Reserve currencies with countries seemingly looking to diversify their exposure, uh, using things like Nordic currencies, the Chinese renminbi, and get this, the Canadian dollar. We have a chance and whether or not, again, there was an agreement and whether or not it was renewed, uh, again, Saudi Arabia is considering other

agreements with other countries, and not just in terms of selling oil in different currencies, but the country is even considering joining the BRICS Alliance, which contains some of the biggest opponents internationally to the US Dollar's global use. There has also been that headline around Enbridge, uh, Central Bank digital currency project targeted at establishing a system for trading between its members that includes countries like Thailand and China. It's unclear whether we'll see that become more popular or used among other nations, or whether we even see much use among the participants, but it has gotten to a point of minimum viability. And while this doesn't seem to be introducing a new cryptocurrency to compete with the US dollar, it would look to challenge US-focused systems like Swift, a global financial messaging network that a lot of current cross transactions are carried out through. And this all goes to highlight that there are some trends here around countries again diversifying their currency exposure, but even with that, the US dollar still has significant ground over really any other currency and as

highlighted by the IMF post. Not only are we not seeing a severe drop in US holdings, but there's no indication that this trend is accelerating, even in the face of concerns or criticisms over how much power the US has over global financial transactions. And while Saudi Arabia does seem to be warming up to other countries, it doesn't necessarily mean a freezing of relations with the United States. In fact, the two nations are reportedly finalizing a significant military deal. And in some areas, the US dollar is actually gaining ground. According to the Federal Reserve Bank of Atlanta, for example, the share of debt securities denominated in US dollars to non-banks outside the US has broadly increased over time to now roughly 54%. So, while the makeup of US dollars in certain uses has been trending downwards, it's not a clear signal that everyone is moving away from the dollar, and clearly not an indication that anyone is about to abandon it. But that's the story and where we currently stand. None of this is to try and predict what will happen with

the US dollar or to claim that the US economy and its monetary system might not face challenges in the future. The intent here is to be descriptive of our current environment, not predictive, but hopefully these data points do help to provide some context for analyzing and digesting the headlines out there, and hopefully the whole situation really highlights the importance of media literacy and attribution. I can understand how these mistakes would happen. There were a lot of articles sharing this headline from seemingly legitimate news sources. I don't expect everyone consuming the news to go and double-check the uh international agreements around Petro dollars that are being mentioned, but in the changing news environment and with developing technologies, it's going to be more and more important to have that sort of media literacy that applies to news but also uh with investments when deciding what sources to consider and weighing investment decisions. And hopefully the story didn't go and distort anyone's own investment choices. Anyway, thanks for watching. Before I sign off, I do want to give a quick thank you to today's

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whole and where you might see the dollar going from here. Thanks again for joining me, and as always, not just with investments, but even when consuming news and other content online, be safe out there.

The Fake Petrodollar Story - No, Saudi Arabia Didn’t Ditch the Dollar

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The videos on this channel are for education purposes only and do not constitute financial advice. Richard Coffin does not provide recommendations on The Plain Bagel - those looking for investment advice should seek out a registered professional. Richard is not responsible for investment actions taken by viewers and his content should not be used as a basis for investment trades.