It seems the entire world and their leaders have awoken from a deep slumber after two long Covid lockdown years, and are starting to put in place all the things they had envisioned over their respective terms. Amid the Zelensky/Putin headlines on an hourly basis, the Wall Street Journal (WSJ), on 15 March 2022, released a story of Petro-Yuan—that Saudi Arabia is actively considering switching from the US dollar to the Chinese yuan in all future oil sales to China, a move that would dent the US dollar’s dominance of the global petroleum market and mark another shift by the world’s top crude exporter toward Asia. Saudi Arabia is one of the top three producers of oil along with Russia and the US. China is the world’s largest consumer of oil, so it seems a direct match to trade in yuan, instead of the dollar.
Despite these talks floating around for years, they have now begun to take a serious turn ever since the relationship between Saudi Arabia and the US began to thaw with the arrival of Joe Biden at the White House. As Saudi Arabia is dissatisfied with what it perceives as insufficient US support for its war against Yemen, such as the removal of the advanced Patriot and THAAD missile defence systems from the kingdom in 2021, as well as Washington’s ongoing condemnation of the murder of Saudi journalist Jamal Khashoggi. In response, Saudi Crown Prince Mohammed bin Salman (MBS) suggested in an interview from 3 March that the Gulf kingdom may reduce its investments in the US. “We have the possibility of boosting our interests, and the possibility of reducing them,” MBS declared.
Currently, China buys 25 percent of Saudi oil exports. The global standing of the Chinese yuan would strengthen in the event oil is traded in Chinese currency, instead of US dollars. Futures contracts within the Saudi petroleum and natural gas company, Aramco, may also be denominated in Yuans, which would be dubbed the ‘petroyuan.’ This would be a major shift in the oil market, as approximately 80 percent of oil sales are transacted in US dollars. In addition to it, China began creating oil contracts that involve the yuan instead of the dollar in 2018. These have been particularly useful for trading with countries under US sanctions, such as Iran.
Historically, the Petrodollar system has been put in place since the early 1970s, not long after president Richard Nixon decoupled the dollar from gold. In 1974, Washington and Riyadh struck a deal by which Saudi Arabia could buy US treasury bills before they were auctioned. In return, Saudi Arabia would sell its oil in dollars—not only enlarging the currency’s liquidity but also using those dollars to buy US debt and products. The political economist David Spiro, in his book The Hidden Hand of American Hegemony, described how Saudi Arabia convinced other OPEC nations to invoice oil in dollars, rather than in a basket of different currencies.
A natural relationship was formed between Saudi Arabia and the US, where the former would sell its oil in exchange for the dollars earned to be reinvested into the US treasury market and security promises. The dollar has been the world’s reserve currency and the currency basis for all commodities that have to be bought and sold in dollars. It means, countries that buy oil would need to buy dollars via their local currency first to then buy the commodity, only to sell it back and receive the dollars and exchange it back to their local currency. This consistent demand for the dollar is one of the reasons why it has maintained that reserve status. But if the bigger players decide to use another method of payment, then the system is at risk of breaking down.
If the yuan displaces the dollar to a sufficient degree in the annual $14 trillion global oil trade—although what that sufficient degree would be is difficult to say—countries will have to maintain yuan reserves instead. (At the moment, 2.48 percent of the world’s reserves are held in yuan, compared to 55 percent for the dollar, according to IMF data.) Oil producers receiving yuan would have to spend it on Chinese debt and imports, further strengthening China’s economy, but if the world was particularly awash in yuan, other trade might start to be yuan-denominated: metals, say, or soybeans.
Needless to say, US officials are not pleased with this development. A senior US official called the idea of the Saudis selling oil to China in yuan “highly volatile and aggressive” and “not very likely.” Calling the move “aggressive” is ironic given how the US has used the dollar as a weapon for decades. But this could be nothing but talk. Selling oil in yuan would come with some risks to the Saudi economy. The Saudi riyal is pegged to the dollar. Prince Mohammed’s aides have reportedly warned him of unpredictable economic damage should the country hastily start selling millions of barrels of oil for yuan. Regardless, it’s no surprise that the Chinese and Saudis have ramped up talks in recent weeks. The weaponisation of the dollar has been on full display.
After Russia invaded Ukraine, the US cut some Russian banks, including the central bank, off from the SWIFT payment system. SWIFT and dollar dominance gives the US a great deal of leverage over other countries. But that leverage depends on the dollar’s role as the reserve currency. It shouldn’t shock us that we’re seeing blowback from the US using greenbacks as a foreign policy carrot and stick. A drop in the demand for dollars would be bad news for a US government that depends on dollar demand to fund its out-of-control spending. Imagine a world in which the Chinese didn’t need dollars.
China ranks as the biggest foreign holder of US debt. If it continues to divest itself of dollars, who will pick up the slack? The Federal Reserve has been buying Treasuries hand over fist for the last two years, keeping its big fat thumb on the bond market. But it’s tapering purchases and supposedly planning on shrinking its balance sheet. If global demand for Treasuries drop precipitously—and it would in a world without the petrodollar—the US government would either have to drastically cut spending or the Fed would have to continue printing money to monetise the debt.
The writer is a political analyst. He can be reached at jai.dhirani@yahoo.com.
He tweets
@Thakurjaid.
Currently, China buys 25 percent of Saudi oil exports.
Despite these talks floating around for years, they have now begun to take a serious turn ever since the relationship between Saudi Arabia and the US began to thaw with the arrival of Joe Biden at the White House. As Saudi Arabia is dissatisfied with what it perceives as insufficient US support for its war against Yemen, such as the removal of the advanced Patriot and THAAD missile defence systems from the kingdom in 2021, as well as Washington’s ongoing condemnation of the murder of Saudi journalist Jamal Khashoggi. In response, Saudi Crown Prince Mohammed bin Salman (MBS) suggested in an interview from 3 March that the Gulf kingdom may reduce its investments in the US. “We have the possibility of boosting our interests, and the possibility of reducing them,” MBS declared.
Currently, China buys 25 percent of Saudi oil exports. The global standing of the Chinese yuan would strengthen in the event oil is traded in Chinese currency, instead of US dollars. Futures contracts within the Saudi petroleum and natural gas company, Aramco, may also be denominated in Yuans, which would be dubbed the ‘petroyuan.’ This would be a major shift in the oil market, as approximately 80 percent of oil sales are transacted in US dollars. In addition to it, China began creating oil contracts that involve the yuan instead of the dollar in 2018. These have been particularly useful for trading with countries under US sanctions, such as Iran.
Historically, the Petrodollar system has been put in place since the early 1970s, not long after president Richard Nixon decoupled the dollar from gold. In 1974, Washington and Riyadh struck a deal by which Saudi Arabia could buy US treasury bills before they were auctioned. In return, Saudi Arabia would sell its oil in dollars—not only enlarging the currency’s liquidity but also using those dollars to buy US debt and products. The political economist David Spiro, in his book The Hidden Hand of American Hegemony, described how Saudi Arabia convinced other OPEC nations to invoice oil in dollars, rather than in a basket of different currencies.
A natural relationship was formed between Saudi Arabia and the US, where the former would sell its oil in exchange for the dollars earned to be reinvested into the US treasury market and security promises. The dollar has been the world’s reserve currency and the currency basis for all commodities that have to be bought and sold in dollars. It means, countries that buy oil would need to buy dollars via their local currency first to then buy the commodity, only to sell it back and receive the dollars and exchange it back to their local currency. This consistent demand for the dollar is one of the reasons why it has maintained that reserve status. But if the bigger players decide to use another method of payment, then the system is at risk of breaking down.
If the yuan displaces the dollar to a sufficient degree in the annual $14 trillion global oil trade—although what that sufficient degree would be is difficult to say—countries will have to maintain yuan reserves instead. (At the moment, 2.48 percent of the world’s reserves are held in yuan, compared to 55 percent for the dollar, according to IMF data.) Oil producers receiving yuan would have to spend it on Chinese debt and imports, further strengthening China’s economy, but if the world was particularly awash in yuan, other trade might start to be yuan-denominated: metals, say, or soybeans.
Needless to say, US officials are not pleased with this development. A senior US official called the idea of the Saudis selling oil to China in yuan “highly volatile and aggressive” and “not very likely.” Calling the move “aggressive” is ironic given how the US has used the dollar as a weapon for decades. But this could be nothing but talk. Selling oil in yuan would come with some risks to the Saudi economy. The Saudi riyal is pegged to the dollar. Prince Mohammed’s aides have reportedly warned him of unpredictable economic damage should the country hastily start selling millions of barrels of oil for yuan. Regardless, it’s no surprise that the Chinese and Saudis have ramped up talks in recent weeks. The weaponisation of the dollar has been on full display.
After Russia invaded Ukraine, the US cut some Russian banks, including the central bank, off from the SWIFT payment system. SWIFT and dollar dominance gives the US a great deal of leverage over other countries. But that leverage depends on the dollar’s role as the reserve currency. It shouldn’t shock us that we’re seeing blowback from the US using greenbacks as a foreign policy carrot and stick. A drop in the demand for dollars would be bad news for a US government that depends on dollar demand to fund its out-of-control spending. Imagine a world in which the Chinese didn’t need dollars.
China ranks as the biggest foreign holder of US debt. If it continues to divest itself of dollars, who will pick up the slack? The Federal Reserve has been buying Treasuries hand over fist for the last two years, keeping its big fat thumb on the bond market. But it’s tapering purchases and supposedly planning on shrinking its balance sheet. If global demand for Treasuries drop precipitously—and it would in a world without the petrodollar—the US government would either have to drastically cut spending or the Fed would have to continue printing money to monetise the debt.
The writer is a political analyst. He can be reached at jai.dhirani@yahoo.com.
He tweets
@Thakurjaid.
Currently, China buys 25 percent of Saudi oil exports.
