One of the core staples of the past 40 years, and an anchor propping up the dollar's reserve status, was a global financial system based on the petrodollar. This was a world in which oil producers would sell their product to the US (and the rest of the world) for dollars, which they would then recycle the proceeds of in dollar-denominated assets and, while investing in dollar-denominated markets, explicitly prop up the USD as the world reserve currency. All of this would support the standing of the US as the world's undisputed financial superpower.
Those days are coming to an end.
One day after we reported that the "UK is asking Saudis for more oil even as MBS invites Xi Jinping to Riyadh to strengthen ties", the WSJ is out with a blockbuster report, noting that "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 - something which Zoltan Pozsar predicted in his last note - and 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 has taken advantage of the dollar's reserve status by printing as many dollars as needed to fund government spending for the past decade.
According to the report, the talks with China over yuan-priced oil contracts have been off and on for six years but have accelerated this year as the Saudis have grown increasingly unhappy with decades-old U.S. security commitments to defend the kingdom.
The Saudis are angry over the U.S.’s lack of support for their intervention in the Yemen civil war, and over the Biden administration’s attempt to strike a deal with Iran over its nuclear program. Saudi officials have said they were shocked by the precipitous U.S. withdrawal from Afghanistan last year.
China buys more than 25% of the oil that Saudi Arabia exports, and if priced in yuan, those sales would boost the standing of China’s currency, and set the Chinese currency on a path to becoming a global petroyuan reserve currency.
As even the WSJ admits, a shift to a (petro)yuan 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" as the majority of global oil sales—around 80%—are done in dollars, and the Saudis have traded oil exclusively in dollars since 1974, in a deal with the Nixon administration that included security guarantees for the kingdom. It appears that the Saudis no longer care much about US "security guarantees" and instead are switching their allegiance to China.
As a reminder, back in March 2018, China introduced yuan-priced oil contracts as part of its efforts to make its currency tradable across the world, but they haven’t made a dent in the dollar’s dominance of the oil market, largely because the USD remained the currency of choice for oil exporters. But, as Pozsar also noted recently, for China the use of dollars has become a hazard highlighted by U.S. sanctions on Iran over its nuclear program and on Russia in response to its invasion of Ukraine.
Today's historic transition is not exactly a surprise: China has been stepping up its courtship of the Saudi kingdom in recent years, helping Saudi Arabia build 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 Saudi relationship with the U.S. has deteriorated under President Biden, who said in his 2020 campaign that the kingdom should be a “pariah” for the killing of Saudi journalist Jamal Khashoggi in 2018. Prince Mohammed, who U.S. intelligence authorities say ordered Mr. Khashoggi’s killing, refused to sit in on a call between Mr. Biden and the Saudi ruler, King Salman, last month.
It also comes as the U.S. economic relationship with the Saudis is diminishing: the U.S. is now among the top oil producers in the world, a stark reversal from the 1980s when it imported 2 million barrels of Saudi crude a day, but those numbers have fallen to less than 500,000 barrels a day in December 2021. By contrast, China’s oil imports have swelled over the last three decades, in line with its expanding economy. Saudi Arabia was China’s top crude supplier in 2021, selling at 1.76 million barrels a day, followed by Russia at 1.6 million barrels a day, according to data from China’s General Administration of Customs.
“The dynamics have dramatically changed. The U.S. relationship with the Saudis has changed, China is the world’s biggest crude importer and they are offering many lucrative incentives to the kingdom,” said a Saudi official familiar with the talks.
“China has been offering everything you could possibly imagine to the kingdom,” the official said.
In retrospect, we now know the reason why MBS wasn't taking Biden's phone calls.
Needless to say, the US is not happy with this historic transformation: a senior U.S. official told the WSJ that the idea of the Saudis selling oil to China in yuan was “highly volatile and aggressive” and “not very likely.” The official said the Saudis had floated the idea in the past when there was tension between Washington and Riyadh.
It is, of course, possible that the Saudis could back off. Switching millions of barrels of oil trades from dollars to yuan every day could rattle the Saudi economy, which has a currency, the riyal, pegged to the dollar. Prince Mohammed’s aides have been warning him of unpredictable economic damage if he moves ahead with the plan hastily. Or perhaps, Saudi Arabia is merely preparing for the day when the peg will be broken to sever the last major linkage to the US.
Doing more sales in yuan would more closely connect Saudi Arabia to China’s currency, which hasn’t caught on with international investors because of the tight controls Beijing keeps on it. Contracting oil sales in a less stable currency could also undermine the Saudi government’s fiscal outlook.
As the WSJ adds, the impact on the Saudi economy would likely depend on the number of oil sales involved and the price of oil. Some economists said moving away from dollar-denominated oil sales would diversify the kingdom’s revenue base and could eventually lead it to repeg the riyal to a basket of currencies, similar to Kuwait’s dinar.
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“If it is (done) now at a time of strong oil prices, it would not be seen negatively. It would be more seen as deepening ties with China,” said Monica Malik, chief economist at Abu Dhabi Commercial Bank.
Still, the Saudis plan to do most oil transactions in dollars, but the transition has begun, and the move could tempt other producers to price their Chinese exports in yuan as well. China’s other big sources of oil are Russia, Angola, and Iraq.
“The oil market, and by extension the entire global commodities market, is the insurance policy of the status of the dollar as reserve currency,” said economist Gal Luft, co-director of the Washington-based Institute for the Analysis of Global Security who co-wrote a book about de-dollarization. “If that block is taken out of the wall, the wall will begin to collapse.”
While nothing new to regular ZH readers (see this from 2017, "The World's New Reserve Currency? Everything You Need To Know About PetroYuan"), the idea of a new global reserve currency was reintroduced last week by none other than former NY Fed staffed Zoltan Pozsar who wrote in his latest must-read note that "when this crisis (and war) is over, the U.S. dollar should be much weaker and, on the flipside, the renminbi much stronger, backed by a basket of commodities. From the Bretton Woods era backed by gold bullion, to Bretton Woods II backed by inside money (Treasuries with un-hedgeable confiscation risks), to Bretton Woods III backed by outside money (gold bullion and other commodities)."
And so the pieces of the endgame are falling into place: Russia starving the western world of much-needed resources, sending commodity prices ever higher, while its silent partner China quietly picks up the monetary pieces and takes advantage of the Western scramble to secure resources at all costs, and approach all those other "non-western" former petrodollar clients - who are also rich in other resources - to offer them a new product, the yuan, which Beijing is now actively and aggressively pushing to dethrone the dollar as a global reserve currency.
By Tyler Durden for Zerohedge
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I will warn you about currency if you do not understand economics, I do not like Biden or his use of American system abuse out right Price Blinken Sullivan, the three clowns, the three fake Presidents, There will be another USA President, wait, trust me not them, I always work out,
Next, the Yuan is kept captative by the CCP government of China, the Yuan is a worthless currency outside of China, and Xi will drop you, when your no longer of value, short term solutions, never turn out the right way/ Look at the capitol flight of money, 9% Sunday and another 9% on Monday, what is wrong with this picture, those fools invested the China,
Pumped and dumped the stocks and bonds and stole the money, CPP did, they do this every several years they need to con the people out of their money, China out right steals it from Chinese Billionaires, MBS your not a citizen, when there is a crisis? Who will be left holding the bags. During the early Pandemic, China highjacked a Canadian Face Mask Company, stole all their machinery and production, employees, and jailed the Canadians,
And the Chinese currency is so controlled, you can not get money out of China because of extreme currency controls, on all foreign currencies. ALL
To me, this is the key, even more so than the threat of sanctions. They see inflationary pressures destroying the value of the dollar, especially during the last couple of years.
OTOH, the dollar is more or less transparent. The yuan/renminbi is controlled at the pleasure of the Central Party. May the buyer beware.
Strategically, the unipolar World Order that has emerged in the aftermath of the collapse of the former Soviet Union under the leadership of the United States is gradually giving way to a multipolar one being ushered by the Chinese-Russian strategic alliance.
Furthermore, China is the world’s largest economy based on purchasing power parity (PPP) and is also the world’s largest importer of crude oil as well as the driving force behind global oil demand. It is also wedded to Russia, the world’s superpower of energy.
For Saudi Arabia, China is the biggest destination for its oil exports of almost 2.0 million barrels a day (mbd). Moreover, Saudi oil investments in China are huge. Equally China is enhancing its investments in Saudi Arabia.
Saudi Arabia will also be seeking to diversify its assets and financial reserves. Many countries around the world particularly the Arab Gulf producers are pondering that if the United States and its allies can freeze the foreign currency reserves of a central bank the size of Russia, they are starting to worry that their reserves are not as safe as they once thought and start to diversify away from the dollar.
When China launched the petro-yuan on the 26th of March 2018, the motivation behind it was to challenge the dominance of the petrodollar in the global oil market and to ensure that global currency usage reflect this shift in global economic power. The truth of the matter is that China does not plan to allow the US financial system to dominate the world indefinitely.
The petrodollar came into existence in 1973 in the wake of the collapse of the international gold standard which was created in the aftermath of World War II under the Bretton Woods agreements. The Nixon administration struck a deal with Saudi Arabia to price and sell its oil exclusively in US dollar.1975, all of the OPEC nations agreed to follow suit.
The petrodollar system provides at least three immediate benefits to the United States. (1) It increases global demand for US dollars. (2) It also increases global demand for US debt securities and (3) it gives the United States the ability to buy oil with a currency it can print at will. In geopolitical terms, the petrodollar lends vast economic and political power to the United States. Maintaining the petrodollar is America’s primary goal. Everything else is secondary.
It will be an irony if the country that helped bring the petrodollar into existence could be the one that might undermine it. Will the United States take the Saudi move lying down or will it take revenge on the House of Saud as it did with the late Saddam Hussein who dared drop the dollar in favour of the euro and Mummar al Gaddafi who proposed an African gold Dinar for pricing and selling Africa’s oil exports?
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London
I would assume SA not making the shift earlier was at the pleasure of the US and in return of protection, which have clearly been not very promising or rewarding seeing the current global events.
Still SA would keep reserves in USD, at least till the dollar collapse attributed to similar moves by more countries around the world (China have already been doing this and have agreements with lots of countries) and due to the uncontrollable US debts. It's only a matter of when.
China is producing global needs, it have most of Africa and Asia in its pocket, it have all the energy in the world at its fingertips. It does not intervene in other countries inner affairs and only care about trade and economic dominance.
China is building space station, further controlling rare earth elements all around the globe and advancing in nuclear fusion to produce the sun energy on earth, so in the future it wont even need energy from any other country, then total economic enslavement.
The Russian war will strengthen China, weaken Russia and the West, and prepare China for a global economic dominance (China would never want a military conflict, economy does not flourish in wars). The war between Russia and Ukraine will benefit China as Russia will be very desperate for it's help.
BRICS (Brazil, Russia, India, China and South Africa) is bout 26.7% of the world land surface and 41.5% of the world population. They can even have a very flourishing planet on their own, which can become powerful than the G7 or even the G20 (some of them already in both) , and although not perfect for the time being, but would still be a ready alternative for a global dominant economical alliance.