The ‘Petroyuan’ Will Not Replace the Petrodollar in Oil Trading

News AnalysisBeijing has been pushing to replace the petrodollar with the “petroyuan” in its oil trade with Saudi Arabia, but it is unlikely to happen. Saudi Arabia exports $145 billion worth of oil per year, making it the world’s largest exporter. China buys $204 billion, qualifying it as the world’s largest buyer. Currently, Saudi Arabia exports $45.8 billion to China alone. Oil is priced and traded in U.S. dollars (or petrodollars), and Beijing hopes to replace the petrodollar with the petroyuan. In reality, the petrodollar has existed only as a concept for several decades. In the 1970s, when the United States became an oil importer, the government printed money to pay for oil. Other countries held U.S. dollars in reserve to keep exchange rates stable, reducing the effects of inflation in the United States. The dominance of the U.S. dollar has allowed the United States to run tremendous budget deficits, such as funding technological advancement and the military, while avoiding the negative impact of currency devaluation. Today, oil exporters demand to be paid in U.S. dollars because they prefer to hold U.S. dollars in reserve, and many of them use the dollar as a peg or stabilizer for their currency. OPEC members Saudi Arabia, Iraq, and the United Arab Emirates (UAE) peg their currency to the dollar. Algeria and Iran use the dollar as an exchange rate anchor. Venezuela uses the dollar as an inflation-targeting framework. Nigeria uses the dollar as a monetary aggregate target. Kuwait pegs the dinar to a basket of currencies dominated by U.S. dollars. Oman, a non-OPEC oil producer, and Qatar have their currency pegged to the dollar. Payment in any currency other than dollars, including the yuan, would increase foreign currency exchange risk for these countries. General view of Saudi Aramco’s Ras Tanura oil refinery and oil terminal in Saudi Arabia on May 21, 2018. (Ahmed Jadallah/Reuters) None of the oil-producing nations peg their currency to the yuan. They prefer to be paid in dollars because the U.S. dollar is readily exchangeable, backed by American taxpayers, and has a century or more of broadly consistent macroeconomic policy management. China established a petroyuan in 2018, launching yuan oil futures. The petroyuan has not been popular, though, even among Chinese oil companies, because it has limited convertibility, and the Bank of China essentially controls the value. Additionally, Beijing’s tight capital controls make the yuan an impractical currency for international oil settlement. China purchases a quarter of Saudi Arabia’s oil and has been trying to convince the Kingdom since 2016 to settle at least part of those purchases in yuan. So far, no agreement has been reached. The Saudi Arabian riyal is pegged to the U.S. dollar, which means any negative impact that yuan-trading has on the dollar would also damage the riyal. In 1974, three years after then-President Richard Nixon took the United States off of the gold standard, he made a deal with Saudi Arabia that if Riyadh would price oil in dollars, Saudi Arabia could purchase U.S. Treasurys before they were auctioned. In return, Saudi Arabia convinced the other oil-producing nations to price oil in dollars rather than a basket of international currencies. As a result, Saudi Arabia holds a large part of its $429.7 billion of foreign currency reserves in U.S. dollars and U.S. government securities. If Saudi Arabia resents the control the United States has over the economy, or if the Kingdom is trying to achieve greater autonomy by diversifying the currency it trades in, this is a mistake because the yuan is part of a closed financial system controlled by the Chinese Communist Party (CCP). The Saudis would be ceding, rather than gaining, monetary independence. Meanwhile, Beijing and Riyadh would still be forced to use U.S. dollars to complete their transactions. China allows the trading of oil futures in yuan, but these futures are only contracts that guarantee final delivery in exchange for yuan. Every step of the delivery process involves intermediaries, most of whom will want to be paid in U.S. dollars. When Saudi Arabia receives U.S. dollars for oil, whether from the United States or China, it uses them to purchase U.S. dollar bonds. Saudi Arabia does not hold significant amounts of yuan in reserve; therefore, accepting yuan for oil would involve converting the yuan to dollars to purchase U.S. dollar bonds. This would add unnecessary steps and expenses to Saudi Arabia’s foreign currency regimen. An oil tanker is being loaded at Saudi Aramco’s Ras Tanura oil refinery and oil terminal in Saudi Arabia on May 21, 2018. (Ahmed Jadallah/Reuters) Another reason why the Kingdom cannot price oil in yuan is that it does all of its accounting in dollars. The best Beijing could hope for would be for Saudi Arabia to agree to accept the yuan to settle a portion of bilateral oil trade with the oil still priced in U.S. dollars. Even if Saud

The ‘Petroyuan’ Will Not Replace the Petrodollar in Oil Trading

News Analysis

Beijing has been pushing to replace the petrodollar with the “petroyuan” in its oil trade with Saudi Arabia, but it is unlikely to happen.

Saudi Arabia exports $145 billion worth of oil per year, making it the world’s largest exporter. China buys $204 billion, qualifying it as the world’s largest buyer. Currently, Saudi Arabia exports $45.8 billion to China alone.

Oil is priced and traded in U.S. dollars (or petrodollars), and Beijing hopes to replace the petrodollar with the petroyuan.

In reality, the petrodollar has existed only as a concept for several decades. In the 1970s, when the United States became an oil importer, the government printed money to pay for oil. Other countries held U.S. dollars in reserve to keep exchange rates stable, reducing the effects of inflation in the United States.

The dominance of the U.S. dollar has allowed the United States to run tremendous budget deficits, such as funding technological advancement and the military, while avoiding the negative impact of currency devaluation.

Today, oil exporters demand to be paid in U.S. dollars because they prefer to hold U.S. dollars in reserve, and many of them use the dollar as a peg or stabilizer for their currency.

OPEC members Saudi Arabia, Iraq, and the United Arab Emirates (UAE) peg their currency to the dollar. Algeria and Iran use the dollar as an exchange rate anchor. Venezuela uses the dollar as an inflation-targeting framework. Nigeria uses the dollar as a monetary aggregate target. Kuwait pegs the dinar to a basket of currencies dominated by U.S. dollars. Oman, a non-OPEC oil producer, and Qatar have their currency pegged to the dollar.

Payment in any currency other than dollars, including the yuan, would increase foreign currency exchange risk for these countries.

saudi-aramco-oil-refinery
General view of Saudi Aramco’s Ras Tanura oil refinery and oil terminal in Saudi Arabia on May 21, 2018. (Ahmed Jadallah/Reuters)

None of the oil-producing nations peg their currency to the yuan. They prefer to be paid in dollars because the U.S. dollar is readily exchangeable, backed by American taxpayers, and has a century or more of broadly consistent macroeconomic policy management.

China established a petroyuan in 2018, launching yuan oil futures. The petroyuan has not been popular, though, even among Chinese oil companies, because it has limited convertibility, and the Bank of China essentially controls the value. Additionally, Beijing’s tight capital controls make the yuan an impractical currency for international oil settlement.

China purchases a quarter of Saudi Arabia’s oil and has been trying to convince the Kingdom since 2016 to settle at least part of those purchases in yuan. So far, no agreement has been reached. The Saudi Arabian riyal is pegged to the U.S. dollar, which means any negative impact that yuan-trading has on the dollar would also damage the riyal.

In 1974, three years after then-President Richard Nixon took the United States off of the gold standard, he made a deal with Saudi Arabia that if Riyadh would price oil in dollars, Saudi Arabia could purchase U.S. Treasurys before they were auctioned. In return, Saudi Arabia convinced the other oil-producing nations to price oil in dollars rather than a basket of international currencies. As a result, Saudi Arabia holds a large part of its $429.7 billion of foreign currency reserves in U.S. dollars and U.S. government securities.

If Saudi Arabia resents the control the United States has over the economy, or if the Kingdom is trying to achieve greater autonomy by diversifying the currency it trades in, this is a mistake because the yuan is part of a closed financial system controlled by the Chinese Communist Party (CCP). The Saudis would be ceding, rather than gaining, monetary independence.

Meanwhile, Beijing and Riyadh would still be forced to use U.S. dollars to complete their transactions. China allows the trading of oil futures in yuan, but these futures are only contracts that guarantee final delivery in exchange for yuan. Every step of the delivery process involves intermediaries, most of whom will want to be paid in U.S. dollars.

When Saudi Arabia receives U.S. dollars for oil, whether from the United States or China, it uses them to purchase U.S. dollar bonds. Saudi Arabia does not hold significant amounts of yuan in reserve; therefore, accepting yuan for oil would involve converting the yuan to dollars to purchase U.S. dollar bonds. This would add unnecessary steps and expenses to Saudi Arabia’s foreign currency regimen.

Epoch Times Photo
An oil tanker is being loaded at Saudi Aramco’s Ras Tanura oil refinery and oil terminal in Saudi Arabia on May 21, 2018. (Ahmed Jadallah/Reuters)

Another reason why the Kingdom cannot price oil in yuan is that it does all of its accounting in dollars. The best Beijing could hope for would be for Saudi Arabia to agree to accept the yuan to settle a portion of bilateral oil trade with the oil still priced in U.S. dollars.

Even if Saudi Arabia agreed to conduct all of its trade in yuan, this would still not achieve the CCP’s goal of internationalizing the yuan or threatening to displace the dollar. Saudi Arabia and China would be trading $320 million worth of oil and yuan per working day, while $6.6 trillion U.S. dollars are traded on global foreign exchange markets every day. This means that the daily trade between the two countries represents a tiny fraction of the dollars used for trade settlement across the globe.

Despite the pandemic and the oil slump in the past two years, Saudi Arabia’s foreign currency reserves, including gold, stand at $429.7 billion. The country experienced a deficit of 4.8 percent in 2021 but is expecting a surplus in 2022. And the Kingdom’s ratio of public debt to GDP is one of the lowest in the world, at 30.8 percent.

In short, Saudi Arabia’s economy is strong. Unlike other countries that the CCP can co-opt, Saudi Arabia is not desperate for Beijing’s help. Additionally, China has not threatened to stop buying oil if Saudi Arabia refuses to trade in yuan.

Saudi Arabia has nothing to gain by switching to the yuan. Meanwhile, dropping the greenback would damage the Saudi economy. Consequently, although talks between Saudi Arabia and China will probably continue, it is unlikely that Saudi Arabia would agree to use the yuan for a significant percentage of oil trade with China.

The U.S. dominance of the global financial system will remain intact, and the yuan will always be the global currency of some unknown far-off future.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.


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Antonio Graceffo, Ph.D., has spent more than 20 years in Asia. He is a graduate of the Shanghai University of Sport and holds a China-MBA from Shanghai Jiaotong University. Graceffo works as an economics professor and China economic analyst, writing for various international media. Some of his books on China include "Beyond the Belt and Road: China’s Global Economic Expansion" and "A Short Course on the Chinese Economy."