The move away from Petrodollar
In 1974, US President Richard Nixon and King Faisal from Saudi Arabia struck a deal. This deal gave birth to the petrodollar system which still lasts until this day. The deal involves Saudi Arabia selling oil to its largest buyer back then, the U.S. In turn, the U.S. provides Saudi Arabia with money, military aid, and political support. The Saudis then reinvest billions of their petrodollar revenue back in U.S. Treasury bonds.
Since that seminal deal, Oil has traded in U.S. dollars almost exclusively, even when the buyers and producers are not American. The consequence of the dollar-for-oil trade is massive. It creates a huge demand for dollars, therefore establishing US Dollar’s hegemony in world trade. The arrangement has also allowed the U.S. to run a huge deficit and borrow money at very low-interest rates to finance the U.S. spending and growth for the next 4 decades.
In recent years, however, several nations have tried to abandon petrodollar. The incentives come from the increasingly used tactic of economic sanctions by the Western nations. Washington, for example, has targeted the Russian economy and imposed an economic burden to force Moscow into submission. In response, Russia has gradually moved away from the reliance to U.S. dollar. Russia worked with China to create an alternative to the SWIFT payment system which is not controlled by Western interest. China and Russia have also agreed to use yuan and ruble for bilateral oil trading. A non-dollar trading system will allow countries to bypass and counter the impact of the sanctions. This move away from petrodollar has lessened the US ability to use the dollar as a weapon.
The Alternative of Petroyuan
Today, China is replacing the U.S. position as the top oil importer. From China’s point of view, it makes sense to use Yuan to price the world’s most important commodity. Just as petrodollar creates more demand for US dollar and supports U.S. economy in the past 4 decades, petroyuan can also stimulate demand for things in China, whether goods and services, Panda bonds (yuan-denominated bonds) or securities.
