The End of the Petrodollar Era – China and Saudi Arabia Want To Replace the King Dollar With the Yuan.

A new world monetary order is emerging.

Three weeks after the start of the Russian invasion of Ukraine, the International Monetary Fund (IMF) issued a statement detailing further the risks and consequences of this war in its eyes:

“The war could fundamentally alter the global economic and geopolitical order, if energy trade shifts, supply chains reconfigure, payment networks fragment, and countries rethink their currency reserves.”

The IMF for once seems to have got it right. According to reports in the Wall Street Journal, China and Saudi Arabia are exploring the possibility of paying for Saudi crude in yuan.

The issue is far from marginal and could precipitate the move. Some 25% of China's oil imports out of a total of some 10.5 million barrels per day (according to the latest monthly report of the PEC) are supplied by Saudi Arabia, the rest being delivered mainly by Russia, Iraq and Angola. In addition, the Kingdom, which exports an average of 6.2 million barrels per day, is also among the main suppliers of crude to Japan and India.

An ever-widening fault line between America and Saudi Arabia

This desire is not new, but it takes on a new dimension with the war in Ukraine, which draws a fault line between Western countries and emerging countries. Even if they do not approve of the Russian invasion, the emerging countries are reluctant to align themselves with the position of the United States and Europe.

Since the sanctions imposed on Venezuela, Iran and now Russia, emerging countries have become less dependent on the United States. For the Saudis, the mistrust is even older. Since Crown Prince Mohammed bin Salmane, the regime's strongman, was ostracized by the Biden administration, which accused him of instigating the assassination of dissident journalist Jamal Kagoshi, relations between Washington and Riyadh have become more distant. Thus, the recent appeal by Joe Biden to Saudi Arabia to increase its production to lower the price of a barrel of crude oil, which had exceeded 100 dollars, remained a dead letter.

Riyadh also criticizes the United States for not supporting the coalition formed with the United Arab Emirates, which has been bogged down since 2015 in the civil war in Yemen where it is fighting a Houthi rebellion, supported by Iran. By the end of 2021, according to a balance sheet drawn up by the UN, this war had claimed 377,000 lives, 150,000 of which were due to the fighting, the rest due to famine and disease. In addition to the human cost, it has a financial cost for Saudi Arabia that amounts to tens of billions of dollars.

Moreover, the Saudi kingdom feels less and less a part of a system put in place in 1974 - after the end of the Bretton Woods agreements and the oil crisis - by the administration of Richard Nixon. In exchange for security guaranteed by the United States, the Gulf oil monarchies agreed to denominate their transactions in dollars. In this way, the oil-producing countries accumulated foreign exchange reserves in dollars, and the oil-consuming countries had to purchase dollars to buy oil, reinforcing the role of the greenback as a reference currency.

With their petrodollars, the Gulf monarchies bought US Treasury bonds, thus financing the US budget deficit.

The United States aims to become the world's largest oil producer

Since that time, the oil market has changed. OPEC has integrated Russia and other exporting countries to form OPEC+ in order to better control the evolution of oil prices. At the same time, the United States is competing with Saudi Arabia and Russia to become the world's leading oil producer, thanks to the development of fracking and the authorization granted by Donald Trump at the beginning of his presidency to oil companies to explore and drill in American soil. As a result, the United States, which imported 2 million barrels per day of Saudi crude in the early 1990s, has dropped to less than 500,000 barrels per day in December 2021, according to the U.S. Energy Information Agency. A figure that is expected to fall in the future, if the Venezuela sanctions are lifted.

Even if for the moment more than 80% of oil sales contracts are still denominated in dollars, more and more emerging countries are no longer hesitating to do without, as shown by India's purchase of Russian crude via a ruble/rupee transaction.

The exorbitant privilege of the dollar is also based on the extraterritoriality of US law, which allows the US Department of Justice to prosecute a foreign company outside the US for the sole reason that it has carried out its operations in dollars. For example, the French bank BNP Paribas was fined $9 billion for conducting transactions with countries such as Sudan, Iran and Cuba, which are under US sanctions.

Finally, one of the beneficiaries of this movement could be the euro, as Russia and China have in recent years reduced their exposure to the dollar, replacing it with the euro and gold. While Beijing has never hidden its intention to make the yuan a reserve currency, and has already obtained some concessions in this direction from the IMF, it is handicapped by the fact that it remains under Beijing's political influence.

A visit of Xi Jinping in Saudi Arabia planned for May 2022 to seal this agreement

Beyond the currency issue, emerging economies are accelerating joint investment projects. Last month, China and Russia signed a contract to build a gas pipeline between the two countries. Last week, a Saudi delegation toured Asia, signing deals in Pakistan, India and China. Among the 35 economic cooperation agreements signed with Beijing, the cumulative value of which amounts to $28 billion, according to the Saudi Press Agency SPA, is the project to build a refinery and a petrochemical complex, for an investment of $10 billion.

The royal oil company Aramco will form a joint venture with the Chinese defense conglomerate Norinco, which has oil activities, to develop a refinery complex - with a capacity of 300,000 barrels per day - and petrochemicals in the city of Panjin, in the northeastern province of Liaoning, near the border with North Korea. Aramco will supply up to 70% of the oil for the complex, which is expected to start operations in 2024.

As a sign of the two countries' strengthening relations, at the invitation of the King, Chinese President Xi Jinping will pay an official visit to the kingdom, probably in May 2022, after the end of Ramadan. With a view to sealing a historic agreement with Saudi Arabia? This is a possibility that cannot be avoided in a changing world.

A new world monetary order is being born before our eyes, giving birth to a kind of Bretton Woods III, which will be backed by outside money: gold, commodities, and why not Bitcoin. A phenomenon that should challenge American domination of the world, while accelerating the emergence of China as the world's first superpower in the future.

While China will have its work cut out for it with a demographic challenge on its side and other major challenges concerning its economy, the America-China struggle promises to be at the center of global geopolitics for the next few decades.