Could a currency deal between the world’s biggest exporter of crude and its biggest buyer trigger a new challenge to the US dollar’s global supremacy?
That was the speculation about a potentially crucial repositioning in the oil world, following reports in the Wall Street Journal last week that Saudi Arabia could allow the Chinese to pay for their crude in their own currency, the yuan, rather than dollars.
Talks about yuan-priced contracts have been going on for at least six years but the negotiations have intensified in recent months, with Chinese leader Xi Jinping set for a visit to Saudi Arabia as soon as May.
A change in how China pays for Saudi oil could be a significant step towards challenging the status quo of the petrodollar. Washington and Riyadh came to a deal in 1974 in which Saudi Arabia agreed to sell its oil in dollars and use the liquidity to buy US debt. Other OPEC nations took the same path in selling their oil for dollars, which they invested in dollar-denominated assets, cementing the greenback’s claims as the world’s reserve currency.
Yuan-denominated oil contracts might put a few cracks in the annual $14 trillion global oil trade, sparking other oil nations to offer the same payment terms. Oil producers receiving the yuan would be more likely to spend it on Chinese imports and Chinese debt. Perhaps other commodity markets might start to embrace the yuan as a payment currency as well.
Changes like these could interest countries wary of their overreliance on the dollar, especially in the wake of US leadership of the sanctions campaign against Russia afterPutin’s Ukraine invasion (which has also seen Moscow excluded from US dollar flows through the now ‘weaponised’ Swift international payments system).
Relations have cooled markedly between Riyadh and Washington since Joe Biden promised to make the kingdom into a “pariah” for the murder of journalist Jamal Khashoggi four years ago. The Saudis are also unhappy that the Americans are trying to revive the Iran nuclear deal. Changes in the commercial logic of the oil world are playing a part too. In the 1980s the US was importing two million barrels of Saudi crude a day, the WSJ says. But sales had fallen to less than 500,000 barrels a day last year, as the Americans warm to their newer role as an energy exporter.
In contrast China’s oil imports have surged over the last three decades. Saudi Arabia was its top supplier in 2021, supplying 1.76 million barrels of crude a day,
The counterargument is that the Saudis are bluffing with talk of doing a deal with the Chinese. The riyal is pegged to the dollar, so weakness in the American currency would be felt directly in their domestic economy. The potential impact of a deal is being overstated too, some analysts think. Even if the totality of trade between the Saudis and the Chinese was paid for in yuan, it would only amount to about $320 million each working day, says Michael Every, global strategist at Rabobank. That’s a tiny amount compared to the $6.6 trillion of international trade conducted on a daily basis in dollars.
What’s more, the world still much prefers to hold the greenback, including investors in China, added David Fickling on Bloomberg last week. Overseas debt denominated in dollars held by Chinese-based banks grew $474 billion in the five years to last September, versus an increase of $127 billion in yuan-denominated securities.
The greenback’s grip seems unlikely to loosen, unless there is a wider loss of confidence in the US currency. The yuan might make incremental gains as a rival financial system starts to take shape in places like Africa, where China is the largest lender and greatest source of new investment. Beijing’s Belt and Road Initiative might bring more of its neighbours in Asia into China’s financial orbit as well. But the dollar seems set to play its wider role as the world’s dominant currency for some time to come.
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