This week there has been more tension than usual around conversations regarding Saudi Arabia selling oil to China in Chinese yuan instead of American dollars. This wouldn’t be the first time China has offered to buy oil using yuan, but this would be the first time their offer is being seriously entertained. According to the Wall Street Journal this week, Saudi Arabia has been weighing the logistics of making the sale to China in yuan since the value of the dollar has been more erratic lately than ever before.
Inflation in the United States is rampant. We all know about the infamous gas prices, it's affected farmers who are spending 35% more on fuel to maintain operation. This is causing the prices of farm-grown food to rise by about 7%. Airfare is also expected to be about 7% more expensive in the coming months. Prices are going up on anything that is delivered via boat, plane, train, or truck. The rise in costs for the businesses is pushed onto the consumer, thus creating inflation.
When consumer purchases make up nearly 70% of the United States’ GDP, according to The Balance, rising costs will only naturally affect consumer spending on other products. Sucking the economy’s strength will only slow economic growth.
So while the idea of Saudi Arabia selling oil in currencies other than the dollar has floated around, it was less likely to happen before because the money used in Saudi Arabia, the riyal, is tabbed by the dollar. Now that the dollar is showing signs of weakness, Saudi Arabia is weighing their options. They’re the second-ranked oil-producing country in the world; second to the United States, according to The United States Energy Information Administration. The irregularity of the American dollar now is impacting the value of the Saudi Arabian riyal.
In terms of the “petrodollar,” The Hill explains, “Nearly 80 percent of global oil sales are priced in dollars, and since the mid-1970s the Saudis have exclusively used the dollar for oil trading as part of a security agreement with the U.S. government.” The United States’ command over the rest of the world is based on the strength of the petrodollar. How America rebounds will determine the future of globalization. However, with oil in such high demand now, other nations of the world are seeing the United States’ recent weakness as an opportunity.
What’s maintained the dollar’s authority has been other countries continuing to buy oil with reserves of American money. In other words, the dollar is viewed as an anchor currency by comparison to most other countries' money. Quartz points out how the “link was forged in the early 1970s, not long after President Richard Nixon decoupled the dollar from gold. In 1974, Washington and Riyadh struck a deal by which Saudi Arabia could buy US treasury bills before they were auctioned. In return, Saudi Arabia would sell its oil in dollars, not only enlarging the currency’s liquidity but also using those dollars to buy US debt and products.” It’s suspected by political scientist David Spiro that this transaction set forward the precedent for other OPEC (Organisation of Petroleum Exporting Countries) nations to price oil in dollars.
As of today, according to IMF, just under 2.5% of the world’s oil reserves are in yuan. More than half of the world’s reserves are held in dollars. So hypothetically, if Saudi Arabia agreed to sell the right amount of oil to China in yuan it could throw off the entire balance. China’s economy would strengthen significantly because the countries accepting yuan for barrels of oil would be bartering oil for Chinese debt. Eventually, the yuan would be more widely accepted, like how the dollar is now. Not to say a strong Chinese economy is undesirable, but the effects of something like this taking place would cause the United States’ economy to crumble.
It’s a lot of change to consider. There are good aspects as well as bad. With cryptocurrencies also becoming more prevalent, the main concern across the board is the economic shift and what it could mean for the future. Since the consequences of a sale of this proportion would be catastrophic, no sales of this magnitude have been made official yet. There is still plenty to consider.