Why It Matters If Saudi Arabia Sells Oil In Chinese Yuan Instead Of US Dollars

By Samanth Subramanian   Published March 17, 2022

Looking into the Future of Capitalism

Capitalism is just a collection of human decisions. We can change it if we want to.

Not for the first time, China is attempting to buy oil in yuan rather than dollars, and now it may have found a willing seller. Saudi Arabia, which sells a quarter of its exports to China, is considering making these sales in yuan, the Wall Street Journal reported.

These negotiations, which have surged and ebbed over the last half-decade, are not likely to fructify soon. For one, Saudi Arabia pegs its riyal to the dollar, so any damage inadvertently dealt to the dollar will hurt its own currency. But the US’ geopolitical hegemony is based so significantly on the petrodollar—with 80% of global oil transactions denominated in dollars—that the question is ever-present. What would the world look like if the petroyuan became the oil industry’s currency of choice? 

Aramco’s tanks and oil infrastructure at the Ras Tanura crude oil refinery in Saudi Arabia.

The US’ economic dominance was built on the petrodollar

The dollar’s robust status as a reserve currency owes much to the strength of the US economy. But it also derives from the dollar’s ample liquidity, which is partially a result of countries maintaining pools of dollar reserves to buy oil.

That link was forged in 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.

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% of the world’s reserves are held in yuan, compared to 55% 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.

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https://qz.com/2143450/saudi-arabia-wants-to-sell-its-oil-in-yuan-not-dollars/?utm_source=YPL