Petroyuan Would Be a Kick in the Gut for the Dollar
The comments below are an edited and abridged synopsis of an article by Michael Maharrey
In another blow for dollar dominance, Saudi Arabia is reportedly considering pricing at least some of its Chinese oil sales in yuan.
The move would dent dollar dominance of the global petroleum market and mark another shift by the world’s top crude exporter toward Asia. The petrodollar serves as a crucial support for the US dollar.
The majority of global oil sales are priced in dollars, ensuring constant demand for the greenback. This helps support the US government’s borrow-and-spend policy with its massive deficits. As long as the world needs dollars for oil, the Fed can keep printing dollars to monetize the debt.
Saudi Arabia has sold oil exclusively for dollars since 1974. If the Saudis switch to selling oil for yuan, it would be bad news for dollar dominance and good news for the yuan. China buys more than 25% of Saudi oil exports.
China and Saudi Arabia have been discussing yuan-based oil contracts for six years. But Saudi Arabia’s frustration with the US has accelerated those talks.
The Chinese rolled out yuan-based oil contracts in 2018. They have been modestly successful, but haven’t dented the dollar’s dominance. If Saudi Arabia begins doing business in yuan, it would be a kick in the gut for the dollar, and it would be a boon for China. China would love to limit its exposure to the dollar.
Selling oil in yuan would come with some risks to the Saudi economy. Its riyal is pegged to the dollar. There could be unpredictable economic damage should the country start selling oil for yuan.
It’s no surprise that the Chinese and Saudis have ramped up talks recently. The weaponization of the dollar has been on full display, along with the Russia/Ukraine conflict and the shutting down of the SWIFT payment system.
SWIFT and dollar dominance gives the US leverage over other countries, but that leverage depends on the dollar’s role as the reserve currency.
China is the biggest foreign holder of US debt. If it continues to divest itself of dollars, who will pick up the slack? The Fed has been buying Treasuries for the last two years, but it is tapering purchases and supposedly planning on shrinking its balance sheet. If global demand for Treasuries drops precipitously—and it will with no petrodollar—the US government would either have to drastically cut spending or continue printing money to monetize the debt.