Saudi Arabia is currently negotiating with Beijing to change the way they price oil for China. If implemented, sales would be made in yuan. Saudi Arabia is also considering implementing yuan-denominated contracts, known as the petroyuan, in the pricing model of Saudi Arabian Oil Co., Aramco. Some professionals fear this change could be detrimental to the U.S. dollar’s dominance of the global market. This change would be another attempt to shift the world’s top crude exporter to China. Negotiations have been going since China introduced using yuan for oil sales in 2018; recently they have picked up speed because Saudi Arabia is unhappy with U.S. security commitments.
Saudi Arabia Angry With U.S., Changes Oil Pricing
There are many reasons Saudi Arabia is angry with the United States. Saudi Arabia is angry over the lack of support during Yemen’s civil war. They are also angry over Biden’s attempt to strike a deal with Iran over their nuclear program. Saudi officials said they were shocked by the “precipitous” U.S. withdrawal from Afghanistan last year. Currently, despite their best efforts, Biden’s administration is unable to even set up a phone meeting with the leader of Saudi Arabia, Crown Prince Mohammed bin Salman. The Biden administration wants to come to an agreement with Saudi Arabia. According to US and Middle East officials, the Crown Prince won’t take Biden’s call but is openly forging a new relationship with China.
Saudi Arabia produces 6.2 million barrels of oil a day. China currently buys 25% of the oil produced by Saudi Arabia. Along with 80% of the global market, Saudi Arabia has traded oil in dollars since a deal with Nixon that included security guarantees for the kingdom in 1974. However, using dollars is problematic for China due to U.S. sanctions on Iran and Russia over nuclear programs and the Ukraine invasion. If priced in yuan, the standing of China’s currency changes radically by those oil sales. Introducing the yuan to global oil markets would raise the status of the currency and lead to a wider acceptance of it worldwide. What does this mean for the U.S. dollar?
What Changing to Yuan Means for the Dollar
According to Wall Street Journal, U.S. Dollar experts say Saudi Arabia and China’s relationship is a symbolic move rather than a threat to the dollar’s status as the reserve currency. “It could marginally dent the dollar’s role as the reserve currency, but not that much,” Cornell University economics professor, Eswar Prasad, told Axios. “Ultimately, as a reserve currency, you still need a very liquid currency with deep financial markets and strong institutions,” he added.
The dollar will likely remain the world’s reserve currency for a while. Central banks held 59% of reserves in dollars during the fourth quarter of 2020. Dollar-denominated debt outside the U.S. is constantly rising, hitting $12.6 trillion as of 2020. This leads many experts to believe the dollar will continue to be the World’s strongest currency, despite being tenth by CMC Markets.
The only way to truly know how Saudi Arabia changing oil sales to yuan for China will affect the global market is to wait and monitor announcements from both countries carefully. This decision, coupled with reactions from other countries, can affect the standing of the U.S. dollar. However, experts say that is unlikely. What do you think will happen if China and Saudi Arabia solidify their relationship in this way?
Written by: Erinn Malloy