Saudi Arabia is considering pricing part of its oil shipments in Yuan, undermining the US dollar’s dominance in the global petroleum market and signalling yet another shift toward Asia by the world’s top crude producer.
According to the Wall Street Journal, negotiations with China over yuan-priced oil contracts have been on and off for the past six years, but have lately gathered up steam as the Saudis have grown more unsatisfied with decades-old US security guarantees.
The Saudis are angered by the US’ lack of support for their involvement in Yemen’s civil war, as well as the Biden administration’s efforts to strike a compromise with Iran over its nuclear programme.
It is common knowledge that China already imports more than 25% of Saudi Arabia’s oil exports. If priced in yuan, it would be a huge step for the Kingdom to price even portion of its nearly 6.2 million barrels per day of petroleum exports in anything other than the US dollar.
The great bulk of global oil sales—roughly 80%—are in dollars, and the Saudis have exclusively dealt in dollars since 1974, when they inked a security guarantee contract with the Nixon government. In 2018, China launched yuan-priced oil contracts as part of its efforts to make its currency tradeable worldwide, but they haven’t diminished the dollar’s dominance of the oil market.
The United States, on the other hand, is one of the world’s biggest oil producers. According to the US Energy Information Administration, the US used to import 2 million barrels of Saudi oil per day in the early 1990s, but that amount has since fallen to less than 500,000 barrels per day in the month ending December 31, 2021.
China’s oil imports, on the other hand, have expanded in unison with the country’s increasing economy during the previous three decades. Saudi Arabia was China’s primary crude supplier in 2021, delivering 1.76 million barrels per day, followed by Russia at 1.6 million barrels per day, according to Chinese data.
Given the foregoing, some analysts say that decreasing oil sales in a less secure currency, such as the Yuan, may threaten Saudi Arabia’s fiscal position. The impact on the Saudi economy would most likely be decided by the volume of oil sold and the market price.
On the other hand, another group of notable economists believes that shifting away from dollar-denominated oil sales would diversify the Kingdom’s income base and might eventually lead to the Saudi Riyal (SAR) being tied to a basket of currencies, as Kuwait did.