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Once again, like the ongoing Water Wars in France, recent geopolitical maneuvers read like a lost chapter from the OODA Loop Urtext: Kim Stanley Robinson’s near-future science fiction masterpiece, The Ministry of the Future (TMoF).
Those who have read the book will recall that influential stakeholders and policymakers from the financial and monetary systems figure very prominently in the narrative. The book argues that legacy nation-state-based systems will have to survive and retain some level of societal trust for new systems of value capture, storage, and exchange to emerge to address later stages of the climate crisis.
Recent reporting from Bitcoin.com and The Wall Street Journal on Saudi Arabia’s movement away from the U.S. dollar is an “origins story”, which makes the speculative fiction in TMoF read even more as a deeply accurate non-fiction complete with investigative reporting from the future.
Saudi Arabia Open to Trading in Currencies Other Than US Dollar, Signaling a Shift Toward De-Dollarization
“In more recent times, the U.S. dollar’s hegemony has been seemingly threatened.”
After a 48-year relationship solely with the U.S. dollar, Saudi Arabia’s Finance Minister, Mohammed Al-Jadaan, said the kingdom is open to trading in currencies other than the U.S. dollar. The statements follow China’s president, Xi Jinping, urging the Gulf monarchs to accept yuan for oil, and Riyadh officials saying last March the country would consider accepting the Chinese currency.
Saudi Arabia’s Move Away from US Dollar Signals Changing Economic Landscape
The world’s elite met in the Swiss Alpine town of Davos for the 2023 World Economic Forum, and Saudi Arabia’s Finance Minister, Mohammed Al-Jadaan, spoke to Bloomberg TV…Al-Jadaan stunned reporters when he said Saudi Arabia is open to trading in other currencies. “There are no issues with discussing how we settle our trade arrangements, whether it’s in the U.S. dollar, the euro, or the Saudi riyal,” Al-Jadaan said. The finance minister added: I don’t think we are waving away or ruling out any discussion that will help improve the trade around the world.”
“Our aim is really to bridge the divide, our aim is to be a force of communication and we are encouraging communication, whether it is China, the U.S., or others,” Al-Jadaan remarked at the World Economic Forum in Davos. The Saudi Arabian finance minister’s statements have been interpreted as another step toward de-dollarization. To understand why Al-Jadaan’s comments are significant, one must go back in time. In 1971, the U.S. government and President Richard Nixon ended the gold standard, and over the next three years, oil prices skyrocketed. In 1973 and 1974, federal officials and U.S. Treasury Secretary William Simon visited with monarchs in Riyadh.
At that time, the petro-dollar was born as Simon convinced the Saudis to sell oil in U.S. dollars and instructed them to purchase Treasury bonds. In addition to the Saudis, all of the Organization of the Petroleum Exporting Countries (OPEC) followed suit and priced their oil in U.S. dollars. Many believe this has given the U.S. an unfair advantage and that it has been the root cause of many of the wars the U.S. has been involved in over the last few decades. In more recent times, the U.S. dollar’s hegemony has been seemingly threatened. (1)
— Ali Shihabi علي الشهابي (@aliShihabi) November 10, 2021
Saudi Arabia Considers Accepting Yuan Instead of Dollars for Chinese Oil Sales
“…the U.S. economic relationship with the Saudis is diminishing.”
Saudi Arabia is in active talks with Beijing to price some of its oil sales to China in yuan, people familiar with the matter said, a move that would dent the U.S. dollar’s dominance of the global petroleum market and mark another shift by the world’s top crude exporter toward Asia.
The talks with China over yuan-priced oil contracts have been off and on for six years but have accelerated this year as the Saudis have grown increasingly unhappy with decades-old U.S. security commitments to defend the kingdom, the people said.
The Saudis are angry over the U.S.’s lack of support for their intervention in the Yemen civil war, and over the Biden administration’s attempt to strike a deal with Iran over its nuclear program. Saudi officials have said they were shocked by the precipitous U.S. withdrawal from Afghanistan last year.
China buys more than 25% of the oil that Saudi Arabia exports. If priced in yuan, those sales would boost the standing of China’s currency. The Saudis are also considering including yuan-denominated futures contracts, known as the petroyuan, in the pricing model of Saudi Arabian Oil Co., known as Aramco.
It would be a profound shift for Saudi Arabia to price even some of its roughly 6.2 million barrels of day of crude exports in anything other than dollars. The majority of global oil sales—around 80%—are done in dollars, and the Saudis have traded oil exclusively in dollars since 1974, in a deal with the Nixon administration that included security guarantees for the kingdom.
China introduced yuan-priced oil contracts in 2018 as part of its efforts to make its currency tradable across the world, but they haven’t made a dent in the dollar’s dominance of the oil market. For China, using dollars has become a hazard highlighted by U.S. sanctions on Iran over its nuclear program and on Russia in response to the Ukraine invasion.
China has stepped up its courtship of the Saudi kingdom. In recent years, China has helped Saudi Arabia build its own ballistic missiles, consulted on a nuclear program and begun investing in Crown Prince Mohammed bin Salman’s pet projects, such as Neom, a futuristic new city. Saudi Arabia has invited Chinese President Xi Jinping to visit later this year.
It also comes as the U.S. economic relationship with the Saudis is diminishing. The U.S. is now among the top oil producers in the world. It once imported 2 million barrels of Saudi crude a day in the early 1990s but those numbers have fallen to less than 500,000 barrels a day in December 2021, according to the U.S. Energy Information Administration.
By contrast, China’s oil imports have swelled over the last three decades, in line with its expanding economy. Saudi Arabia was China’s top crude supplier in 2021, selling at 1.76 million barrels a day, followed by Russia at 1.6 million barrels a day, according to data from China’s General Administration of Customs. (2)
What Next? Chipping away at the supremacy of the U.S. dollar in the international financial system
- “…Saudi Arabia has recently been considering joining the BRICS nations, which include Brazil, Russia, India, China, and South Africa. At the China-GCC summit, China’s President Xi Jinping urged Saudi Arabia to start accepting yuan for barrels of oil. Moreover, last March, Saudi Arabia said it was thinking about accepting the Chinese currency for oil. The Wall Street Journal noted that the Saudis were not pleased with U.S. President Biden’s dealings with Iran over the country’s nuclear program.
- In October 2022, reports further claimed that members of the Saudi government, including Crown Prince Mohammed bin Salman, privately mocked Biden’s mental acuity. Al-Jadaan detailed on Tuesday that the leaders in Saudi Arabia have a good bond with China and other nations.
- ‘We enjoy a very strategic relationship with China and we enjoy that same strategic relationship with other nations, including the U.S. and we want to develop that with Europe and other countries who are willing and able to work with the US,’ Al-Jadaan remarked. So far, Saudi Arabia’s statements have been considered rhetoric, and none of the aforementioned considerations (accepting yuan for oil, joining BRICS) has come to fruition.
- ‘The dynamics have dramatically changed. The U.S. relationship with the Saudis has changed, China is the world’s biggest crude importer and they are offering many lucrative incentives to the kingdom,’ said a Saudi official familiar with the talks.” (1)
- “’China has been offering everything you could possibly imagine to the kingdom,’ [a Saudi] official said.
- A senior U.S. official called the idea of the Saudis selling oil to China in yuan “highly volatile and aggressive” and “not very likely.” The official said the Saudis had floated the idea in the past when there was tension between Washington and Riyadh.
- The Saudis still plan to do most oil transactions in dollars, the people familiar with their talks say. But the move could tempt other producers to price their Chinese exports in yuan as well. China’s other big sources of oil are Russia, Angola, and Iraq.
- The Saudi move could chip away at the supremacy of the U.S. dollar in the international financial system, which Washington has relied on for decades to print Treasury bills it uses to finance its budget deficit. “The oil market, and by extension the entire global commodities market, is the insurance policy of the status of the dollar as a “reserve currency,” said economist Gal Luft, co-director of the Washington-based Institute for the Analysis of Global Security who co-wrote a book about de-dollarization. “If that block is taken out of the wall, the wall will begin to collapse.”
- Saudi officials in favor of the shift have argued the kingdom could use part of yuan revenues to pay Chinese contractors involved in mega projects domestically, which would help mitigate some of the risks associated with the capital controls over the currency. China could also offer incentives such as multibillion-dollar investments in the kingdom.
- Another official familiar with the talks said yuan pricing could give the Saudis more influence with the Chinese and help convince Beijing to reduce support for Iran.
- Ali Shihabi, who sits on the board of Neom and formerly ran a pro-Saudi think tank in Washington, said the kingdom can’t ignore China’s desire to pay for oil imports in its own currency, particularly after the U.S. and EU blocked the Russian central bank from selling in foreign currencies in its reserves stockpile. “Any doubts countries had about the need to diversify into Yuan and other currencies/geographies would have ended with that huge step,” Mr. Shihabi tweeted…” (2)