Opinion: One day, oil may not be dollars but yuan

Rashid Husain Syed is a Toronto-based journalist, consultant and energy analyst who has lived in Saudi Arabia for a quarter of a century.

The U.S. dollar has been the world’s dominant currency since the 1970s when Saudi Arabia struck a deal with the U.S. that made it the currency for global oil trade.

The arrangement means that any country buying oil, from Somalia and Ethiopia to Europe, India, Sri Lanka, Pakistan and China, needs dollars. This ensures the dollar’s dominance in the global financial system.

Some media have speculated that one of the reasons for the removal of Saddam Hussein and Muammar Gaddafi was their challenge to the use of the US dollar as a currency for oil trade.

The decades-long arrangement that maintains the dollar as the currency for global oil trade is being shaken and may one day end as China emerges as an emerging power and the world’s largest importer of crude oil.

Chinese President Xi Jinping, in a speech to Gulf Cooperation Council (GCC) leaders during a visit to Saudi Arabia in December, urged the Gulf monarchs to make full use of the Shanghai Oil and Gas Exchange’s use of yuan for oil and gas sales.

The Global Times, a Chinese daily, reported on Dec. 8 that there was growing talk of switching to the yuan in oil settlements between China and Saudi Arabia. The Global Times said observers from both countries believed the shift was necessary, given the growing weaponization of the dollar-dominated financial system.

In March 2022, the Wall Street Journal reported that Saudi Arabia was in active talks with Beijing to price some of its oil sales to China in yuan. The talks have been ongoing on and off for six years, sources told The Wall Street Journal, but the talks accelerated as Saudi Arabia grew increasingly uncomfortable with Washington’s abandonment of its security commitments to defend the kingdom. Given the circumstances, Riyadh and its other Gulf Arab allies see 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 pivot to the yuan.

Both China and Saudi Arabia are heavily influenced by the U.S. economy. China holds less than $1 trillion in US Treasuries. Saudi Arabia also owns substantial dollar-denominated assets, including $121 billion in U.S. Treasuries and $608 billion in the U.S. stock market.

Any shift to RMB settlements will only be gradual, especially given that most Middle Eastern currencies are pegged to the US dollar and the global market is too large for the RMB to remain illiquid.

Aware of obstacles in the way, Xi’s joint communiqué at the end of his trip to Riyadh made no mention of any agreement on the use of yuan for oil trade.

But both countries are acting. It may not be long for Riyadh to ignore China’s demands to use the yuan, at least for part of its oil trade. A beginning has already begun.