Beijing is likely to “compel” Saudi Arabia to sell crude oil in yuan, and others will follow, according to the chief economist and managing director at High Frequency Economics Carl Weinberg. This will hit the US dollar, he says.
In an interview with CNBC Weinberg said China has become a key player in the oil market since overtaking the US to become the world’s largest importer.
Saudi Arabia has “to pay attention to this because even as much as one or two years from now, Chinese demand will dwarf US demand,” Weinberg told the media.
“I believe that yuan pricing of oil is coming and as soon as the Saudis move to accept it — as the Chinese will compel them to do — then the rest of the oil market will move along with them,” he added.
A 1974 agreement between US President Richard Nixon and Saudi King Faisal meant Riyadh has been accepting dollars for all its oil exports.
This is a big deal. The petrodollar means that the US dollar (USD) is used as the currency for oil deals between countries that are not the US. If Australia wants to buy oil from Saudi Arabia, and Saudi will only accept USD, then Australia has to somehow acquire US dollars to pay for the oil. A similar dynamic has held sway for most international trade for several decades — it was nearly all done in USD.
This creates much demand for US dollars outside the US. One of the principal exports of the USA since the 1970s has been US dollars. They cost the US almost nothing to produce, but other countries and companies have to send real goods and services to the US to earn those US dollars.
The reason the US supports the Saudis despite all their differences is presumably that the petrodollar agreement means the value of the US dollar is boosted and the US gets lots of free stuff.
This sounds like a free kick for the USA, but it is not all beer and skittles. The extra demand for the US dollar artificially raises the value of the USD, so US manufactures have a harder time competing than if the USD was not used as the international currency. Hence the hollowing out of US industry in recent decades.
China, Russia, and Europe have been working to reduce this advantage of the US, by working at replacing the USD with other currencies in international trade. The end of the petrodollar would be very significant for world trade, US power, and the US-Saudi relationship.
hat-tip Stephen Neil