The way the world buys oil is changing.
More and more, oil is being purchased outside of the petrodollar system.
That’s the same system that has helped make the U.S. so powerful for the past few decades.
Now, Russia is using China’s yuan to settle 25% of its trade with the rest of the world.
On Monday, I promised I would write more about this. So today, let’s look at the changes happening in the oil markets – and what they mean for the dollar.
But first, let’s unpack what petrodollars are and aren’t.
The OPEC-Petrodollar Relationship Effect
There’s no real currency that’s a petrodollar.
The term “petrodollar” sprung to international attention during the 1970s oil crisis, when there were gas lines and historic price spikes.
That was after Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela established the Organization of the Petroleum Exporting Countries (OPEC) in 1960.
Their goal was to unify oil policies for member countries. The thinking was that there is power in joining together.
You can see that influence today in the chart below. It shows OPEC’s share of world crude oil reserves. It controls about 80% of the market…
Back in the ‘70s, oil exporting nations chose to let global oil sales be denominated in U.S. dollars.
The logic was that the U.S. dollar was the most widely used, liquid, and reliable currency. That logic still holds true today.
In 1974, Saudi Arabia agreed to use petrodollars to buy U.S. Treasury bonds. It was one of the earliest petrodollar deals.
Since then, Saudi Arabia and other governments have purchased U.S. military weaponry and other products with petrodollars.
Behind the curtain, though, there’s a hidden truth: There’s no law that oil exporters must accept U.S. dollars for their oil.
Governments can decide what makes the most sense for them economically and geopolitically.
And today, a new power is emerging… the BRICS+ governments.
BRICS+ Turning Away from the Petrodollar?
The BRICS+ powers have been making deals to buy OPEC+ oil in the most prominent currency they can access – the Chinese yuan.
Now, the “petroyuan” is emerging.
To refresh your memory, BRICS stands for Brazil, Russia, India, China, and South Africa.
And the BRICS are now becoming the BRICS+ thanks to six new members, including Saudi Arabia and the United Arab Emirates (UAE).
That means the BRICS+ will include the two largest oil suppliers in the world, Saudi Arabia and Russia.
As I’ve been writing, it’s all part of the group’s plan to challenge Western dominance. That’s also where the petroyuan comes in…
This year, China began using the yuan for most of its energy imports from Russia. India’s largest refinery, Indian Oil Corp, and two other refineries there began paying in yuan for some of their Russian oil imports, too.
China has also asked Middle Eastern suppliers to accept the yuan rather than dollars in oil trades.
What all of this shows is that more and more oil is being purchased outside of the petrodollar.
Russia and China’s De-Dollarization
To be clear, a complete and total shift away from petrodollars won’t ever happen. Markets are too embedded in global oil trade.
But tiny cracks are showing. And a shift is happening.
The two leading oil export and import BRICS countries – Russia and China – are championing the shift.
Russia now tops China’s oil import list. It took that spot from Saudi Arabia this year. So here’s the situation…
China needs oil, and Russia has it. That means dollars don’t have to play a role in China and Russia’s oil trade anymore.
The two countries are also trading more with each other in Chinese yuan.
These developments are due to two main factors.
The first is the freezing of Russia’s foreign bank reserves by the West after Russia invaded Ukraine in February 2022.
The second is that Russia has led the charge for BRICS and others to de-dollarize trade since the financial crisis of 2008, followed by calls from China.
Russia is now using China’s yuan to settle 25% of its trade with the rest of the world.
Throughout the year, China has been building up its Russian crude oil reserve. It just hit its highest level in three years. The move helped push oil prices up further.
And there are no signs of these purchases slowing down. In fact, one of China’s state-controlled petroleum groups is set to double its imports of crude oil from Russia this year.
So, while the dollar isn’t going away anytime soon, neither is the petrodollar.
The U.S. dollar is used in nearly 90% of all foreign exchange transactions. Half of global trade and three-fourths of Asia-Pacific trade is denominated in U.S. dollars.
Most of the world’s oil transactions still occur in dollars. All of those transactions account for billions of dollars every day.
But like I said, the shift away from the dollar is happening. It’s a death by a thousand cuts.
Oil giants Saudi Arabia and the UAE will become part of the BRICS+ in January 2024. That means world oil exports could undergo even more major changes.
As more governments buy and sell oil in non-dollar currencies, it will reduce the breadth of the petrodollar and, ultimately, the amount of dollars used for global trade.
All of this signals a weakened trend for the dollar overall.
Editor, Inside Wall Street with Nomi Prins
P.S. As I said above, the BRICS are working to challenge the U.S. dollar. But they’re not the only ones…
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