The Petrodollar System & Saudi Arabia's Evolving Geopolitical Relationships
The Petrodollar System & Saudi Arabia's Evolving Geopolitical Relationships
Key Takeaways
- The "Petrodollar Agreement" is largely mythological — there was never a formal treaty requiring Saudi Arabia to price oil exclusively in dollars, though an informal understanding emerged in the 1970s
- The 2023 Beijing Agreement fundamentally reshaped regional dynamics — China's successful mediation demonstrated declining U.S. influence as the sole power broker in the Middle East
- Saudi Arabia is pursuing strategic autonomy — maintaining U.S. ties for security while refusing to join anti-Iran coalitions and deepening engagement with Tehran
- Gulf neighbors have significant Iranian ties — Oman, Qatar, and Iraq maintain particularly close relationships with Tehran
- U.S. policy faces structural constraints — massive arms deals and investment commitments haven't translated into the defense treaty or Israel normalization Washington seeks
The Petrodollar System: History and Current State
The Myth of a Formal Agreement
One of the most important clarifications in understanding U.S.-Saudi economic relations: there is no official agreement between the United States and Saudi Arabia to sell oil in US dollars. The widespread narrative of a formal "petrodollar pact" that expired in June 2024 was largely misinformation that spread virally on social media.
What actually existed was a more nuanced arrangement. Against a backdrop of great economic and political uncertainty, as the Watergate hearings pushed toward their close, the Nixon administration embarked on a diplomatic mission that would cement an economic partnership with Saudi Arabia that has been central to the global energy trade. To encourage Riyadh's use of the dollar as the medium of exchange for its oil sales—and thereby funnel those dollars back into Treasury bond markets to help finance US fiscal deficits—Washington promised to supply military equipment to Saudi Arabia and protect its national security.
The Joint Bilateral Commission: The US and Saudi Arabia put together a Joint Bilateral Commission on Economic Cooperation in the 1970s to strengthen US-Saudi relations. The commission was formed in June 1974 and expired on June 9, 2024. However, according to the Government Accountability Office, the commission did not contain any formal agreement on oil trade in US dollars between the two countries.
How the System Actually Worked
The petrodollar system emerged organically following the 1973 oil crisis and the end of the Bretton Woods gold standard in 1971. Oil exports from Saudi Arabia (and later OPEC broadly) have been priced in U.S. dollars since 1974, ensuring a constant global demand for the dollar and U.S. Treasury assets. Today, roughly 80% of global oil transactions are still conducted in USD, illustrating the petrodollar system's enduring influence.
Current State and Evolving Dynamics
Several factors are reshaping the petrodollar landscape:
Shifting Trade Patterns
The United States has become far less dependent on Saudi oil. Thanks to the shale revolution, the United States is now the largest oil producer in the world and a net exporter. It still imports oil from Saudi Arabia but at a significantly lower volume. By contrast, China has become Saudi Arabia's largest oil customer, accounting for more than 20 percent of the kingdom's oil exports.
BRICS and Currency Diversification
Saudi Arabia's willingness to diversify the currencies used in selling its oil aligns with a larger strategy that requires the country to increase its international relations beyond the United States and Europe. The Kingdom's willingness to join the BRICS club of emerging nations and partner with China and other countries in the mBridge project to explore the use of their respective central bank digital currencies (CBDCs) for cross-border payments reflects this strategic pivot.
Dollar's Continued Dominance
Despite these shifts, in the foreseeable future, the dollar's dominance will remain. However, a gradual democratization of the global financial landscape may be underway, giving way to a world in which more local currencies can be used for international transactions—with the dollar prominent but without its outsized clout.
Saudi Arabia-Iran Relations and the Beijing Agreement
The Historic 2023 Rapprochement
On March 10, 2023, Iran and Saudi Arabia agreed to re-establish diplomatic relations and reopen their embassies within two months during talks in Beijing. Top Iranian and Saudi security officials met in Beijing to begin a new chapter in bilateral affairs following sky-high tensions.
The Beijing Agreement: The neighbors in the Persian Gulf signed a deal to restore full-fledged diplomatic ties and reactivate a 2001 security cooperation agreement. The absence of any US or European role—combined with Iraqi, Omani, and Chinese mediation that made this diplomatic breakthrough possible—spoke volumes about what one Emirati political scientist described as the new "post-American Gulf era."
Specific Agreements and Treaties Revived
The Beijing Agreement reactivated two earlier bilateral agreements:
| Agreement | Year | Scope |
|---|---|---|
| General Agreement for Cooperation | 1998 | Economy, Trade, Investment, Technology, Science, Culture, Sports, and Youth |
| Security Cooperation Agreement | 2001 | Security and defense cooperation |
Implementation Timeline
Growing Military and Security Cooperation
In October 2024, Iran, Oman, and Russia carried out naval drills in the northern Indian Ocean, with Saudi Arabia and Qatar among the observers. Dubbed "IMEX 2024," the purpose of these exercises was to strengthen collective security in the region, expand multilateral cooperation, and display goodwill and capabilities to safeguard peace, friendship, and maritime security.
Historic Shift: Military cooperation between Saudi Arabia and Iran on security issues was practically unthinkable in the 2015-20 period. The recent exercises signal major progress in terms of reconciliation between Riyadh and Tehran.
Saudi Arabia's Neighbors with Strong Iranian Ties
Iraq
The most significant aspect of Iran's foreign policy is Iraq. Iraq is a more important field of operations for Iranian officials than other nations where Iran backs local armed organizations. Various Iraqi groups, many of them as part of the Popular Mobilization Forces, have been described as Iranian proxies. Iraq also played a crucial mediation role, hosting five rounds of direct talks between Saudi Arabia and Iran during 2021-2022.
Oman
Oman has been the outlier in the region, often serving as the channel through which the United States and others have communicated with Iran's leadership. Oman maintains uniquely warm relations with Tehran and has served as a consistent mediator in regional disputes, including the Yemen conflict.
Qatar
Qatar, Kuwait, and Oman have found their way to exist with their neighbor on the northern shore of the Gulf. Doha even shares with Tehran the world's largest natural gas reservoir, creating strong economic interdependence and diplomatic pragmatism.
United Arab Emirates
The UAE's Dubai is a key port for trade with Iran and the two countries enjoy a robust economic partnership. The UAE would therefore greatly suffer from unrest in Iran or an attack on its soil, despite having different positions on regional conflicts.
Yemen (Houthis)
Iran has scaled up cooperation with the Houthis, including military assistance and diplomatic support. Notably, once Iran and Saudi Arabia normalized ties in March 2023, Iran's proxies in Yemen—the Houthis—stopped firing missiles and drones on Saudi population centers, demonstrating the practical impact of the rapprochement.
Recent Dynamics: Saudi Arabia's Balancing Act
Resistance to U.S. Anti-Iran Coalition
In March 2024, Saudi Arabia and other Gulf Cooperation Council (GCC) members denied the United States permission to wage military operations against Tehran-aligned groups in the Middle East from bases on their soil. Similarly, the GCC states, including Saudi Arabia, denied Israel access to their airspace when Tel Aviv launched "Operation Days of Repentance" on October 26, 2024, in response to earlier Iranian attacks on Israel.
Protecting Iran's Infrastructure: A few weeks before Israel's October 26 attack, Saudi Arabia successfully lobbied the Biden administration to pressure Israel into not bombing Iran's oilfields. Saudi Arabia's quick condemnation of Operation Days of Repentance, deeming it a "serious violation of Iran's territorial integrity and contradicts established international norms and laws," was significant.
Impact of Gaza War on Saudi-Iran Relations
The Gaza conflict has brought about a degree of Iranian-Saudi alignment while pushing the two countries toward deeper diplomatic engagement. Four days into the war, Iranian President Raisi and Saudi Crown Prince Mohammed bin Salman had their first phone conversation since their countries restored diplomatic ties, agreeing on the "need to end war crimes against Palestine" and promote stronger Islamic unity.
Israel's war in Gaza and the wider region is driving Saudi Arabia and Iran closer together. While Israeli operations have targeted some of Saudi Arabia's historical adversaries—such as the Houthis in Yemen and Hezbollah in Lebanon—the prospect of an all-out war in the Middle East and Israeli dominance in the region has put Saudi Arabia on the offensive, seeking to keep strategic options open.
Implications for U.S. Diplomatic and Economic Policies
The Trump Administration's Response (2025)
The U.S. has responded to shifting regional dynamics with major economic and defense initiatives. In 2025, President Trump and Crown Prince Mohammed bin Salman finalized a series of landmark agreements deepening the U.S.-Saudi strategic partnership. The Crown Prince announced that Saudi Arabia would increase investment commitments in the United States to almost $1 trillion.
| Agreement Type | Value/Scope | Details |
|---|---|---|
| Defense Sales Agreement | $142 billion | State-of-the-art warfighting equipment from 12+ U.S. defense firms |
| Total Investment Commitment | ~$1 trillion | Expanded from initial $600 billion (May 2025) |
| AI Memorandum of Understanding | — | Kingdom access to U.S. AI systems with technology protections |
| Critical Minerals Framework | — | Supply chain diversification collaboration |
| Civil Nuclear Cooperation | — | Joint declaration on negotiations completion |
Skepticism About Deal Implementation
There are reasons for caution about these headline figures. When President Trump signed the 2017 defense deal with Saudi Arabia, the White House claimed it would amount to $110 billion in defense equipment and services. Almost immediately, this figure was viewed with skepticism. A deeper look revealed that the number reflected a generous collection of past and prospective deals, with very little representing binding commitments.
Budget Reality Check: The $142 billion arms deal would represent 176% of the entire Saudi defense budget in 2024, suggesting that even under the best of circumstances, such outlays would have to be spread over many years. Saudi Arabia is facing a projected budget deficit exceeding $67 billion in 2025.
Unresolved Issues
Defense Treaty
There were no signs of progress on the defense pact long sought by Saudi Arabia. For Washington, such a deal remains contingent upon the kingdom's agreement to establish formal relations with Israel.
Nuclear Cooperation
Saudi ambitions to develop a civilian nuclear program with US support remain entangled with the Saudi Arabian-Israeli normalization issue, despite earlier speculation that a standalone agreement might emerge.
Israel Normalization
Saudi Arabia has stated that normalization of relations with Israel depends on finding a clear path to Palestinian statehood alongside Israel, ruling out the possibility of joining the Abraham Accords in the short term. Mohammed bin Salman has announced he does not currently support normalizing relations with Israel due to the lack of a credible path to Palestinian statehood.
Strategic Challenges for U.S. Policy
Competing Influence
The United States has long maintained its political power and influence in the Middle East; however, the increasing Chinese foothold in the region is changing this matrix. The clash of interests, influence, and quests to play a more influential role in terms of diplomacy and economic security is fundamentally reshaping the geopolitics of the Middle East.
Gulf States' Hedging Strategy
Saudi Arabia and Iran's former arch-rivalry has morphed into a pragmatic relationship based on keeping channels of communication open and preventing escalation. Riyadh is especially wary of regional destabilization as the Kingdom embarks on ambitious economic reforms (Vision 2030) to diversify its reliance on oil and boost its tourism sector—goals that require stability at home and in the region.
Current Crisis Management
As of January 2026, Saudi Arabia has reportedly been lobbying the U.S. administration to refrain from striking Iran, while Qatar and Oman have been focused on diplomatic outreach between Iranian and American officials. Gulf nations don't want the chaos that a U.S. attack on Iran or the collapse of the Islamic Republic would generate.
Summary: Strategic Implications
- No Formal Petrodollar Pact: The mythological "agreement" that supposedly expired in 2024 was actually just a bilateral economic commission; the dollar's oil dominance emerged from practice, not treaty.
- China's Rising Influence: Beijing's successful mediation of the Saudi-Iran deal represents a significant shift in Middle Eastern power dynamics and diminished U.S. monopoly on regional diplomacy.
- Saudi Strategic Autonomy: The Kingdom is maintaining robust U.S. defense ties while simultaneously building security cooperation with Iran and refusing to join anti-Iran coalitions.
- Conditional Normalization: Saudi Arabia's path to the Abraham Accords remains blocked by the Palestinian statehood issue, limiting U.S. ability to leverage economic deals into political alignment.
- Economic Reality vs. Headlines: The massive investment and defense figures announced in 2025 should be viewed with skepticism given past non-implementation and Saudi budget constraints.
References and Sources
- Atlantic Council - Is the End of the Petrodollar Near?
- Carson Group - No! Saudi Arabia is Not Ending Any "Petrodollar Pact"
- Radio Free Asia - Did a deal between Saudi Arabia and US to sell oil in dollars expire?
- Atlantic Council - A year ago, Beijing brokered an Iran-Saudi deal
- Foreign Policy Research Institute - Iran-Saudi Normalization
- Wikipedia - Iran–Saudi Arabia relations
- Al Jazeera - Iran and Saudi Arabia agree to restore relations
- U.S. Institute of Peace - U.S. on Iran-Saudi Rapprochement & China
- Arab Center Washington DC - Security Dimensions of the Saudi-Iranian Détente
- International Crisis Group - The Impact of the Saudi-Iranian Rapprochement
- Foreign Affairs - The Saudi Solution
- White House - Trump Solidifies Economic and Defense Partnership with Saudi Arabia
- Washington Institute - Unpacking Trump's 2025 Gulf Investment Tour
- Arab Center DC - Deals Without Guarantees: Trump's Gulf Visit
- Stimson Center - The "Largest Defense Agreement" May Not Add Up
- Council on Foreign Relations - What Iran's Protests Mean for Middle East Countries
- Al Jazeera - Gulf countries gear up diplomacy to stave off US-Iran escalation
Report prepared January 2026 | Sources verified as of publication date