Did Saudi Arabia just doom the dollar? Economists weigh in.

In early June, when Saudi Arabia declined to renew its exclusive use of the U.S. dollar in exchange for oil, but how will that affect consumers? UnSplash +

The economists we consulted believe the effects will be minimal

In early June, when Saudi Arabia declined to renew its exclusive use of the U.S. dollar in exchange for oil, it raised more than a few eyebrows.

For the last 50 years, any country buying oil from the Saudis had to pay in dollars, reinforcing the dollar’s status as the world’s reserve currency and allowing the U.S. to run huge budget deficits without collapsing its currency.

Will that change, now that the Saudis will accept the Chinese yuan and other currencies? Opinions are mixed but the economists we consulted conclude the new arrangement is unlikely to affect the dollar’s status, at least over the next few years.

“If anything, Saudi Arabia is more likely to be impacted by the change,” Irina Tsukerman, president of Scarab Rising, Inc., and a geopolitical analyst told ConsumerAffairs. “China and Iran are likely to exploit the end of the exclusive economic relations with the U.S. to leverage their own economic interests down the road. However, if the general de-dollarization trade continues, that will likely shake consumer confidence and lead to a spike in oil prices.”

Minimal impact on consumers

Julia Khandoshko, CEO at the international broker Mind Money, doesn’t expect U.S. consumers will feel the impact of the Saudi move. She also doesn’t think it will affect oil prices since the U.S. gets most of its oil from the Western Hemisphere.

“What has changed is that the United States has become the largest mining and refining power,” Khandoshko told us. “Moreover, the situation inside Saudi Arabia itself has transformed dramatically.”

While some economists attribute the shift to declining confidence in the dollar, Peter Zeihan, an economist and geopolitical analyst, says the big picture suggests something else.

Not an economic decision

In a video podcast, Zeihan points out that Saudi Arabia only accepting the dollar as payment was in fact, a way to ensure that it could count on the U.S. military for protection against its enemies in the region. With the U.S. having less of a Mideast presence these days, Zeihan says the Saudis want to also curry favor with China.

“This is not an economic decision. It’s a political decision being made, not because they don’t like the dollar, but because they don’t think the dollar gives them the military guarantees that they thought it once did,” Zeihan said.

So in the short run, many economists think the dollar will remain in a strong position and will remain the world’s reserve currency. But Tsukerman sees potential trouble should what the Saudis did become a trend.

“If other nations no longer need dollars to conduct trade, the demand for dollars could plunge significantly,” she said. “That would create a dollar glut and a rapid devaluation of the greenback. Interest rates on U.S. Treasury bonds would soar. In return, that would force the U.S. to raise prices on oil to compensate for the loss in revenue, which would result in lower demand and further empower competitors.”

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