Petrodollar- Some Thoughts

                                   Petrodollar- Some Thoughts

Fifty years old US - Saudi Petrodollar deal has come to an end. The fifty year old deal, from the perspective of 1970’s, was having far reaching influence on global dynamics of both, the supply and pricing of energy. At that point of time US was having more than 30% of global GDP and Saudi Arabia having more than 30% oil supply in its control. Furthermore ending of dollar gold parity in 1971-72, created a trust issue globally. 

The situation has now significantly changed in last five decades:

I- USSR has disintegrated and China has become the second largest economy. This has significantly changed the global political dynamics.

II- Developing countries are emerging as economic hot spots in global scenario.

III- US share in global GDP and Saudi Arabia share in oil have come below 20%, significantly less than 1970’s.

IV- The prominent role of US Dollar, in international trade, is open secret even today, which was and is being exploited by US.

V- Global trade is excessively dependent on US dollar because of its acceptance as global reserve currency and liquidity it offers in the international market because of its GDP. This has provided seigniorage benefit to US Dollar. 

Now, the fall out of this development will lead to:

I- Energy is the basic requirement of every country. If US Dollar denominated pricing is being done away, how price stability of energy will be ensured, making it more vulnerable to price fluctuations. We have seen bilateral and multilateral agreements on this count with limited role and success.

II- Which currency will emerge as a global liquidity provider for smoother international trade, which itself is passing through the phase of protectionism after GFC and Covid?

III-This will certainly impact the geo political dynamics but emerging newer economic world order must be thought of proactively by including more currencies in the basket of currencies of IMF for SDR valuation.

IV- The opaque policies of China are not providing confidence to global economic to serve as accepted global currency despite best efforts by China.

V- The size of other economies are a matter of concern in providing global liquidity.

The development has certainly opened up new vistas  for  international economic and political order.

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