By Nathalie Voit
In what amounts to a crushing defeat of American soft power in the Middle East, the Kingdom of Saudi Arabia has signaled its willingness to consider accepting the Chinese yuan for some of its oil sales to China, The Wall Street Journal first reported on March 15.
The potential agreement to price some of the kingdom’s oil contracts to China in yuan is not new. Still, renewed talks between Riyadh and Beijing signal a deepening alliance between the two autocracies amid growing tensions between Saudi Arabia and the West.
According to the report, the Saudis are reportedly furious over Washington’s decision to scale back support in the Yemen civil war. The Saudis actively fought alongside the United Arab Emirates to hold off Tehran and its Houthi allies. The kingdom is also resentful over the Biden administration’s decision to strike a nuclear deal with Iran, its stated bitter enemy. The Journal said that Saudi officials also expressed shock at the disastrous U.S. withdrawal from Afghanistan last summer.
If the deal to price some of the kingdom’s oil sales in Chinese yuan goes through, Washington is at risk of losing the U.S. dollar’s longstanding dominance over the global petroleum market. This is because China buys about one-quarter of its oil from Saudi Arabia, the world’s largest exporter of crude.
Additionally, the decision to introduce yuan-priced oil contracts to Saudi Arabia could have serious ramifications for global markets, which largely rely on an international financial system where the U.S. dollar reigns supreme, according to economist Gal Luft, co-director of the Washington-based Institute for the Analysis of Global Security.
“The oil market, and by extension the entire global commodities market, is the insurance policy of the status of the dollar as reserve currency. If that block is taken out of the wall, the wall will begin to collapse,” Luft said, according to the report.
Some of Prince Mohammed’s advisors have strongly advised against the shift and warned that de-dollarization could seriously affect the Saudi economy (the Saudis have a national currency, the Saudi riyal, pegged to the dollar).
Because of this, some senior U.S. officials are calling the talks a hoax by the Saudis to bring Washington into line. One aide said the Saudis had resorted to this sort of threat before when the two nations were hostile.
“The Saudis know they have the dollar as the nuclear option,” said one source familiar with the Saudi’s energy policy in 2019, according to Reuters.
Since 1974, the U.S. dollar has been the standard currency for most global oil transactions, including those within the kingdom. Around 80% of all oil sales worldwide are conducted in so-called “petrodollars,” according to the report.