The United States owes a significant part of its eminence as the sole superpower to the dominance of its dollar in the global economy.
This dominance is aided by the fact that the dollar is the currency of the global oil trade. Every country in the world needs U.S. dollars to buy oil.
Even without obtaining goods and supplies from the United States, central banks of all countries are obliged to use the U.S. dollar as their dominant reserve currency. In return, America needs to print dollars without shipping goods and services to countries needing its dollars to buy oil. This helps maintain the American lifestyle.
And oil is the most traded commodity in the world.
So far, the United States has resisted attempts to change the status quo, thwarting any attempts to buy and sell oil in currencies other than its dollar. Those who attempted to do so often paid the extreme price of losing their lives.
In recent memory, Saddam Hussein of Iraq and Moammar Gadhafi of Libya tried it. Analysts suggest the last nail in the coffin of Saddam was his decision to sell Iraqi oil in euros instead of the U.S. dollar. Similarly, when Gadhafi insisted on selling his oil in gold or currencies other than the U.S. dollar, he paid a steep price. Both lost power and eventually their lives.
China, Russia, Iran and Venezuela have endeavoured to use currencies other than the U.S. dollar for oil trade – with little success. To promote oil trade in the yuan, China started a crude-oil contract in Shanghai in 2018, allowing direct participation by international investors to price oil in its currency.
In the current geopolitical scenario, with America and its allies standing up firmly against China, an emerging superpower, and Russia, which is threatening to challenge the status quo, the drive to end the dominance of the U.S. dollar in oil trade seems to have gained momentum.
Dow Jones recently reported that Saudi Arabia, the world’s largest exporter of crude oil, is in active talks with China, the world’s largest importer of oil, to price some of its oil sales to China in yuan.
The outbreak of the Ukraine war and the swath of sanctions imposed on Russia have brought to the fore questions about alternatives to U.S.-currency-based markets. Dow Jones reported that the yuan is in particular focus, given China’s relationship with Russia.
This development should be seen from the perspective of the current state of Saudi Arabia’s relationship with the U.S., which has been buffeted by various issues, ranging from Yemen’s civil war to potential negotiations around Iran’s nuclear program.
It has also been reported that Saudi Arabia has not only resisted American calls to open its crude oil taps, its leadership has so far declined calls from U.S. President Joe Biden on the issue.
The reported push to use yuan for oil sales to China comes when a lack of warmth between Saudi and American leadership is evident.
The Dow Jones report doesn’t say how likely Saudi Arabia is to make such a switch, nor how much of its sales might be denominated in yuan, if at all. It does, however, signal that the conversation around alternatives to the U.S. dollar remains a possibility.
Some also believe that, by spreading the news about the possibility of a change to yuan as the currency for its crude sales to China, Saudi Arabia could be trying to strengthen its bargaining power with the Biden administration. And crude oil remains an important part of this geopolitical chess game.
Bloomberg has also reported that India seems set to buy Russian oil at discounted prices, using yuan. The report added to speculation of expanded global use of yuan in commodity trades, as it benefits from an accelerated move away from the U.S. dollar in the wake of the Russia-Ukraine war.
A reshaping of the global currency system seems to be gaining pace, albeit slowly. Saudi Arabia’s hints about using the currency would be an important step in that direction, said Bloomberg, quoting Guo Jiayi, the chief foreign exchange analyst at CIB Research and Consulting Co.
How will the United States respond?
We are waiting for the answer.
Toronto-based Rashid Husain Syed is a respected energy and political analyst. The Middle East is his area of focus. As well as writing for major local and global newspapers, Rashid is also a regular speaker at major international conferences. He has provided his perspective on global energy issues to the Department of Energy in Washington and the International Energy Agency in Paris. For interview requests, click here.
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