The end of the petroleum dollar?

What Was the Petrodollar Deal Between US and Saudi Arabia That Lasted 50 Years? How Will It Impact the World? – Explained - TheDailyGuardian

According to some analysts, the Chinese yuan is expected to replace the petrodollar as the era of the former is coming to an end. Still, a number of indicators suggest that such a shift is not at all likely. There are several obstacles associated with the Chinese yuan, including its closely watched nature and the restricted mobility of its holders. Meanwhile, supported by the nation's strong economic and political influence, the US dollar maintains its strength and allure. 

How do you define Petrodollar?

  • Any US dollar given in exchange to nations that export oil is known as a petrodollar.
  • The United States dollar was designated as the global reserve currency at the 1944 Bretton Woods conference. The majority of the world's gold reserves were owned by the United States following World War II.
  • When the US and Saudi Arabia reached an agreement to stabilize the oil market after the US abandoned the gold standard, this phrase first appeared in use in the early 1970s.
  • With the expiration of the 50-year-old petrodollar agreement between the US and Saudi Arabia, the dynamics of the global financial system have significantly changed.

Late-period De-dollarization Movement

Fears about the Credibility of the US Dollar: A growing number of nations are shifting away from the US dollar as a result of worries about the US dollar's legitimacy and the US economy's durability.

Unsustainable US Economy: With a budget deficit reaching 16% and a total debt of $31 trillion, many analysts believe that the US debt is unsustainable.

Risk of Global breakdown: A breakdown in the US economy might set off a global economic collapse because of the dollar's hegemony in international trade and banking.

commerce Between China and Russia: Nowadays, more than 90% of commerce takes place on a bilateral basis without using US dollars.

Russia's Ruble Mandate: In an effort to lessen the need for dollars, Russia has made it mandatory to sell gas and oil to Europe in rubles.

China's Belt and Road Initiative: By converting $385 billion in debt into yuan through its Belt and Road Initiative (BRI) initiative, China is encouraging the usage of its currency.

Saudi Arabia's Yuan Oil Sales: The petrodollar system has taken a serious hit as a result of Saudi Arabia's decision to sell oil to China in yuan.

Changes in the World Economy
In both Western and Eastern nations, a discernible trend towards autarkical economic and political policymaking has been observed throughout the last ten years. This change represents a major break from these countries' earlier globalist perspectives. Given this, an increasing number of analysts have predicted that the US dollar's status as the global reserve currency will eventually come to an end. Based on two key tenets, they contend that the Chinese yuan will seize this desired position:

  1. Waning U.S. Influence: The idea that the U.S. economy is becoming less influential in the world arena, as evidenced by fewer beneficial trade and political agreements and a fall in the quantity of commodities and services that are transacted internationally in dollars.
  2. Growing Chinese Influence: The expansion of China's political and economic clout among its neighbors and other emerging nations, mostly as a result of programs like the Belt and Road Initiative (BRI).
  • American Political and Economic Power
    The fallacy surrounding dedollarization. The United States is still a major player on the international scene, despite assertions to the contrary. An excellent example is the Russo-Ukrainian War, in which the United States emerged as a crucial ally and supporter of Ukraine, standing in the shoes of the West and its European allies. China, on the other hand, has mostly avoided controversy out of concern for criticism from its Western allies.
  • Still Preferred Currency: Moreover, as the world's economies naturally grow, commerce between them increases, which causes a relative decrease in the overall amount of trade done in US dollars. This should not be seen as a sign of the US dollar's intrinsic weakness, though. The flood of investment capital into the United States in 2022–2023 as a result of the Federal Reserve's interest rate hikes is proof that the dollar is still the currency of choice for investors. During this time, global central banks followed the Federal Reserve's interest rate adjustments, highlighting the importance of U.S. monetary policymaking.

The Petroyuan vs the Petrodollar

  • Many headlines in the past few years have heralded the impending demise of the petrodollar and the advent of the petroyuan. China has made political and economic agreements with a number of friends and made investment offers through the BRI in an effort to increase its geopolitical might. Unfortunately, this tactic has been beset by unwise economic decisions and predatory contracts, giving rise to what is now referred to as "debt-trap diplomacy."
  • Nations who are unable to pay back loans to China, such as Sri Lanka, have expressed feeling under duress from these arrangements. It is not looking well for China's long-term diplomatic endeavors because of this volatility and unsustainability. The Chinese economy has also been strained by internal issues like the zero-COVID policy and a fall in real estate. One major barrier to the Chinese yuan's potential as the world's reserve currency is its highly regulated nature, which restricts holders' freedom of movement.

Saudi Arabia's Maneuvers in Strategy

  • In an effort to lessen their vulnerability to American oil demand, traditional oil-producing allies like Saudi Arabia are forming ties with other nations, particularly China, as a result of the American shale oil revolution and the country's desire for energy independence. Nonetheless, it is significant that American treasury notes and high-tech imports from the United States, such artificial intelligence, are still preferred by the Saudi government and wealth institutions. This preference highlights how appealing the United States is still as a place to invest and as a trading partner.

The United States Dollar's Future

  • It is hard to imagine a world in which China, with its severely restricted markets and lower-quality goods, overtakes the United States as a better trading partner and investment opportunity, notwithstanding the obstacles and the changing global economic landscape. With its strong and stable economy supporting it, the U.S. dollar continues to be the preferred currency for international investments.

Barriers to the Yuan

  • China has a lot of important obstacles to overcome before it can overtake the US dollar as the global reserve currency. Significant obstacles include the limited mobility of the Chinese yuan and the nation's economic difficulties. These barriers might eventually be removed, and a new currency or set of currencies would emerge to be seen as more significant globally, but in order for that to happen, it would need to be freely traded and backed by a strong economy. It must guarantee that consumers can use it without worrying about the stability of the nation that issued it or about its intrinsic worth.

In summary

  • The argument surrounding the demise of the petrodollar and the emergence of the petroyuan is intricate and multidimensional. The strong economic and political underpinnings of the United States ensure that the U.S. dollar remains dominant, notwithstanding China's notable advancements in its worldwide influence. If a new global reserve currency is adopted, it will be a gradual process with many obstacles to be solved. In terms of global finance, the US dollar continues to be the leading currency.