Rashid Husain Syed is a Toronto-based journalist, consultant, and energy analyst who lived in Saudi Arabia for a quarter of a century.
Ever since the deal in the ‘70s between Saudi Arabia and the United States, making the U.S. dollar the currency of global oil trade, the dollar has remained the dominant currency of the world.
The arrangement meant any country buying oil, from Somalia and Ethiopia to Europe, India, Sri Lanka, Pakistan and China, all needed U.S. dollars. This ensured the dominance of U.S. dollars in the global financial system.
Some media have speculated that one of the reasons behind the removals from power of Saddam Hussein and Moammar Gadhafi was the challenge they posed to using the U.S. dollar as the currency for their oil trade.
With the rise of China as an emerging power and the world’s largest crude importer, the decades-old arrangement of maintaining the U.S. dollar as the currency of global oil trade is under attack – and may one day be over.
While addressing the Gulf Cooperation Council (GCC) leaders during his December visit to Saudi Arabia, President Xi Jinping of China urged the Gulf monarchs to “make full use of the Shanghai Petroleum and Gas Exchange to conduct oil and gas sales using Chinese currency.”
Chinese daily Global Times reported on Dec. 8 that a discussion to shift to using Chinese yuan in China-Saudi oil settlement is increasingly rising. The shift is deemed as necessary by observers from both countries considering the “increasing weaponization of the dollar-dominated financial system,” the Global Times said.
In March, 2022, the Wall Street Journal had reported that Saudi Arabia was in active talks with Beijing to price some of its oil sales to China in yuan. The talks had been off and on for six years, but accelerated as the Saudis grew increasingly uncomfortable with Washington backing off from its security commitments to defend the kingdom, sources told WSJ. In the given scenario, Riyadh and its other Gulf Arab allies looked at Beijing as an emerging military power and a potential ally.
To be sure, Riyadh and Beijing are also aware of the consequences of any such move toward the yuan.
Both China and Saudi Arabia are deeply exposed to the U.S. economy. China holds under $1-trillion in U.S. Treasury bonds. Saudi Arabia also has substantial dollar-denominated assets, including $121-billion in U.S. Treasuries and $608-billion in the U.S. stock markets.
Any shift toward yuan settlement will only be gradual, especially given that most Middle Eastern currencies are dollar-pegged, the global market is too large and the yuan is still not liquid enough.
Realizing the impediments in the process, the joint communique issued at the end of Mr. Xi’s visit to Riyadh did not mention any agreement on using yuan for their oil trade.
But the two countries are moving. For Riyadh to ignore the Chinese request to use yuan, for at least part of its oil trade, may not be possible for long. A beginning has been made.