Saudi Arabia is considering pricing part of its oil shipments in yuan, undermining the dollar’s dominance in the global petroleum market and signalling yet another shift in the world’s biggest crude exporter’s direction toward Asia.
According to the Wall Street Journal, negotiations with China about yuan-priced oil contracts have been on and off for the greater part of six years, but have lately gathered up steam as the Saudis have grown more unsatisfied with decades-old US security guarantees.
The Saudis are incensed by America’s lack of support for their military intervention in Yemen’s civil war, as well as the Biden administration’s attempt to achieve a nuclear deal with Iran.
It’s no secret that China buys more than a quarter of Saudi Arabia’s oil exports, and the kingdom’s decision to price even any of its 6.2 million barrels of oil per day in anything other than the US dollar, if priced in yuan, would be a big step.
The great bulk of global oil transactions — around 80% — are in dollars, and the Saudis have exclusively dealt in dollars since 1974, when they inked a security guarantee contract with the Nixon government. In 2018, China launched yuan-priced oil contracts as part of its efforts to make its currency more globally tradeable, although they have had little impact on the dollar’s dominance in the oil market.
The United States, on the other hand, is one of the world’s biggest oil producers. According to the US Energy Information Administration, the country used to import two million barrels of Saudi oil per day in the early 1990s, but that number has since decreased to fewer than 500,000 barrels per day in the month ending December 31, 2021.
China’s oil imports, on the other hand, have risen in lockstep with the country’s increasing economy during the previous three decades. Saudi Arabia was China’s largest crude supplier in 2021, according to Chinese data, delivering 1.76 million barrels per day, followed by Russia at 1.6 million barrels per day.
In light of these facts, some analysts believe that decreasing oil sales in a less stable currency like the yuan might threaten Saudi Arabia’s financial situation. The amount of oil sold and its market price would most likely decide the impact on Saudi Arabia’s economy.
A group of notable economists, on the other hand, believes that shifting away from dollar-denominated oil sales would diversify the kingdom’s income base and might eventually lead to the Saudi Riyal (SAR) being tied to a basket of currencies, as Kuwait did.