Ahmed Bahakim (South24) 

A global financial system based on the petrodollar has been one of the mainstays of the past 40 years, serving as an anchor for the dollar's reserve status. This was a future in which oil producers would sell their product to the US (and the rest of the world) for dollars, then recycle the revenues in dollar-denominated assets and expressly support the USD as the world reserve currency by investing in dollar-denominated markets. All of this would bolster the United States' position as the world's undeniable financial superpower. Those times are winding down.

Saudi Arabia is in active talks with Beijing to price some of its oil sales to China in yuan, a move that could cripple not only the petrodollar's dominance of the global petroleum market, perhaps it will mark another shift by the world's top crude exporter toward Asia, but also a move aimed squarely at the heart of the US financial system which happened one day after the UK asked Saudi Arabia for more oil even as MBS invites Xi Jinping to Riyadh.

Negotiations with China for yuan-priced oil contracts have been on and off over the past six years, but have picked up steam this year as the Saudis become more dissatisfied with decades-old US security promises to safeguard the country. The Saudis are enraged by the US's lack of backing for their engagement in Yemen's civil war, as well as the Biden administration's attempt to reach a nuclear agreement with Iran. 

China buys more than a quarter of Saudi Arabia's oil exports, and if those purchases were priced in yuan, they would strengthen the Chinese currency's position and put it on a path to becoming a worldwide petroyuan reserve currency. A switch to a Petroyuan system would be a profound shift for Saudi Arabia to price even some of its roughly 6.2 million barrels of day of crude exports in anything other than dollars, because the vast majority of global oil sales around 80% are done in dollars, and the Saudis have traded oil exclusively in dollars since 1974, when they struck a deal with the Nixon administration that included security guarantees for the kingdom. The Saudis appear to have lost interest in the US security assurances and have switched their loyalty to China.

As a recap, China launched yuan-priced oil contracts in March 2018 as part of its efforts to make its currency marketable globally, but they haven't made a difference in the dollar's domination of the oil market, owing to the dollar's continued supremacy as the currency of choice for oil exporters. However, as a result of US sanctions on Iran over its nuclear program and Russia for its invasion of Ukraine, China's usage of dollars has become a risk.

Today's historic shift is not entirely unexpected: China has been courting Saudi Arabia in recent years, assisting the kingdom in developing its own ballistic missiles, consulting on a nuclear program, and investing in Crown Prince Mohammed bin Salman's pet projects, such as Neom, a futuristic new city. Meanwhile, the US-Saudi relationship has deteriorated under President Biden, who declared the country a "pariah" in his 2020 campaign in response to the assassination of Saudi writer Jamal Khashoggi in 2018.

It also comes at a time when the United States' economic relationship with Saudi Arabia is deteriorating: the United States is now among the world's top oil producers, a sharp shift from the 1980s, when it imported 2 million barrels of Saudi crude per day, but that number has dropped to less than 500,000 barrels per day in December 2021. China's oil imports, on the other hand, have risen steadily over the previous three decades, in tandem with the country's growing GDP. According to data from China's General Administration of Customs, Saudi Arabia was China's top crude supplier in 2021, selling 1.76 million barrels per day, followed by Russia at 1.6 million barrels per day. 

The dynamics have shifted substantially. The United States' relationship with Saudi Arabia has shifted, while, China is the world's largest petroleum importer, and it is providing the kingdom with a slew of financial incentives. China has been providing the kingdom everything it could possibly want.

Needless to say, the United States is unhappy with this historic shift; selling oil to China in yuan was very unpredictable and aggressive. When there were tensions between Washington and Riyadh in the past, the Saudis pushed the concept. Of course, it's possible that the Saudis will back down. Changing millions of barrels of oil trades from dollars to yuan on a daily basis might disrupt the Saudi economy, which uses the riyal as its currency. Prince Mohammed's advisers have warned him that moving forward with the plan too quickly might result in unforeseeable economic consequences. Perhaps Saudi Arabia is simply preparing for the day when the peg is broken, severing the last significant link between the kingdom and United States.

More sales in yuan would strengthen Saudi Arabia's ties to China's currency, which hasn't caught on with overseas investors due to Beijing's stringent regulations. Contracting oil sales in a less stable currency might further jeopardize Saudi Arabia's budgetary prospects. 

The economic impact on Saudi Arabia would most likely be determined by the amount of oil sales and the price of oil. Moving away from dollar-denominated oil sales, according to some economists, it would diversify the kingdom's income base and might eventually lead to the riyal being pegged to a basket of currencies, akin to Kuwait's dinar. However, the shift would not be perceived adversely if it would be done now, while oil prices are high, it would be perceived as a strengthening of connections with China. Despite the fact that the Saudis want to conduct most oil transactions in dollars, the transformation has begun, and other producers may be tempted to price their Chinese shipments in yuan as well. Russia and Iraq as well as Angola are China's other major oil suppliers. 

As a result, the pieces of the endgame are falling into place: Russia starving the western world of much-needed resources, driving commodity prices ever higher, while China quietly picks up the monetary pieces and takes advantage of the Western scramble to secure resources at all costs, approaching all those other non-western former petrodollar clients, who are also rich in other resources to offer them a new product, the Yuan.

Ahmed Salem Bahakim 

Energy researcher 

Photo: Forbes Business

Opinions expressed in this analysis reflects its author

References:

Chaudhary, S. (2020, 11 21). Petro-Dollar Vs Petro-Yuan: Is China Set To Replace US. Retrieved 03 2022, from: Link

Durden, T. (2022, 03 15). Saudi Arabia Considers Ditching The Dollar For Chinese Oil Sales. Retrieved from: Link

QUINN, J. (2022, 03 15). What Moved Saudi Arabia to Embrace China. Retrieved from: Link

Summer Said, S. K. (2022, 03 16). Saudi Arabia considers accepting yuan instead of dollars for Chinese oil sales. Retrieved from: Link 

SWFI. (2022, 03 15). PETROYUAN: Institutional Investors May Have to Deal with a New World Order of Currencies. Retrieved from: Link 

Vega, M. (2022, 03 15). Arabia Saudí negocia con China aceptar yuanes en lugar de dólares en sus ventas de barriles de crudo. Retrieved from: Link