In the year 1973, USA president Richard Nixon and Saudi prince Fand Ibn Abdel Aziz signed a deal wherein Saudi Arabia, the leading member state of the OPEC, had to trade in dollars to any country who bought crude oil from them and in exchange they received military protection from USA in the form of weapons and arms. It was coined the term as ‘Petrodollar’ which basically is the revenue generated from crude oil from the trade between countries.
This was going very well for 50 years and most of the countries were using dollars as their medium of exchange for oil until March 8, 2023, when US with European Union and other western countries put sanctions on Russia due to war waged against Ukraine on 24th February 2022. They banned trade, which largely hit Russia’s economy and reached a point where it hit rock bottom. After the Russia-Ukraine started to unravel, Russia and India signed a deal, also known as ‘Rupee Ruble’ wherein they contracted to trade in their specific currencies for crude oil. Moreover, US and Europe becoming less dependent on West Asian oil imports and India and China becoming the main markets for GCC hydrocarbons made Petrodollar less reliable due to the ongoing issues with US and Saudi Arabia. India was determined to make its move to show its financial dominance as it has the potential to break the norm and as Shri Narendra Modi stated “Time has come when our strength and financial markets and institutions strive to become the backbone of international trade”. Furthermore, Russia also signed the deal with China, European Union and mostly with Saudi Arabia to lessen their dependence on US dollars for oil payments.
This will have a huge impact on the inflation hit US economy as it will lose major chunks of its revenues in the oil trade because Asia is the centre of global oil trade and will depreciate its currency due to a fall in the demand for dollars. This would lead to higher price levels for imported countries leading to higher inflation and worse economic situation. But can petrodollar be abolished after being responsible for 99% of oil trades or US might find a way to sustain this.