Executive summary: It’s not good for us
One of the core staples of the past 40 years, and an anchor propping up the dollar’s reserve status, was a global financial system based on the petrodollar – this was a world in which oil producers would sell their product to the US (and the rest of the world) for dollars, which they would then recycle the proceeds in dollar-denominated assets and while investing in dollar-denominated markets, explicitly prop up the USD as the world reserve currency, and in the process backstop the standing of the US as the world’s undisputed financial superpower.
Trump did not face this challenge because his foreign policy was pro-Saudi and anti-Iran. Let’s face fact:
The Saudis hate the Iranians and the Iranians hate the Saudis.
Biden has returned to the Obama era, placate Iran by any means necessary, approach. This pisses off the Saudis, especially when Biden is considering sending Iran billions of dollars just like Obama did. So what’s a Saudi to do? Well, they have options:
In another blow for dollar dominance, Saudi Arabia is reportedly considering pricing at least some of its Chinese oil sales in yuan.
According to the Wall Street Journal , the move would “dent the US dollar’s dominance of the global petroleum market and mark another shift by the world’s top crude exporter toward Asia.”
The “petrodollar” serves as a crucial support for the US dollar.
The majority of global oil sales are priced in dollars. This ensures a constant demand for the greenback. Every country needs dollars to buy oil. This helps support the US government’s borrow and spend policy with its massive deficits. As long as the world needs dollars for oil, the Federal Reserve can keep printing dollars to monetize the debt.
Saudi Arabia has sold oil exclusively for dollars since 1974 under a deal with the Nixon administration. If the Saudis shift away from the dollar and sell oil for yuan, it would be bad news for dollar dominance. And good news for the Chinese currency.
According to the WSJ , China buys more than 25% of Saudi oil exports.
China and Saudi Arabia have been talking about yuan-based oil contracts for six years. But Saudi Arabia’s frustration with the US has apparently accelerated those talks. According to the WSJ , the Saudi government is increasingly unhappy with decades-old US security commitments to defend the kingdom along with the Biden administration’s attempt to reinstitute the Iran nuclear deal.
If Saudi Arabia begins doing business in yuan, it would be a kick in the gut for the dollar.
A drop in the demand for dollars would be bad news for a US government that depends on dollar demand to fund its out-of-control spending. Imagine a world in which the Chinese didn’t need dollars.
China ranks as the biggest foreign holder of US debt. If it continues to divest itself of dollars, who will pick up the slack? The Federal Reserve has been buying Treasuries hand over fist for the last two years, keeping its big fat thumb on the bond market. But it’s tapering purchases and supposedly planning on shrinking its balance sheet. If global demand for Treasuries drop precipitously — and it would in a world without the petrodollar — the US government would either have to drastically cut spending or the Fed would have to continue printing money to monetize the debt.
