A Spate Of Recent Deals Raises Chatter Of A Fading Petrodollar

Following up on last week’s assessment of the rapidly evolving complexion of the world order in crude oil trading, a spate of recent oil-related international deals raises questions about whether the dominance of the petrodollar is evolving as well. While no one has been surprised by Russia’s responding to western sanctions by pressuring its oil buyers to conduct transactions in roubles, recent deals made among other nations to conduct trades in crude and petroleum products using other currencies have raised more eyebrows.

Examples Of Recent Deals

So, what is all the chatter about? Here are a few examples of recent international deals and new alliances that are raising questions about the future of the petrodollar:

• On March 28, Brazil and China, two members in the increasingly influential BRICS Alliance, announced an agreement to conduct all future trade transactions using their own currencies. China ranks as Brazil’s biggest trading partner.
• On March 8, Reuters reported that “Indian customers have paid for most Russian oil in non-dollar currencies, including the United Arab Emirates dirham and more recently the Russian rouble, multiple oil trading and banking sources said.”
• On March 29, Saudi Arabia announced it has agreed to become a “dialogue partner” in the Shanghai Cooperation Organization, a China-led political, economic and security organization designed to compete with similar Western organizations. This latest indication of strengthening ties between Saudi Arabia and China came just
  just
  weeks after the Kingdom and Iran announced an agreement to re-establish diplomatic relations that had been brokered by China.
• Also on March 28, French oil giant Total Energies announced it had completed its first purchase of liquefied natural gas (LNG) from Chinese oil company CNOOC using the Chinese Yuan as the currency.

These and other agreements conducted in recent months have led to speculation that, as oil markets continue to evolve, the petrodollar could be losing its influence.

Some Background

While a high percentage of international crude oil trades had long been conducted in U.S. currency, the petrodollar was more formally established as the global currency of mark for such trades in 1973, in the wake of the first Arab oil embargo. Then, the Richard Nixon administration executed an agreement with Saudi Arabian Prince Fand Ibn Abdel Aziz in which the Saudi Kingdom agreed to conduct its oil trades in U.S. dollars in exchange for U.S. military support and hardware.

The establishment of this arrangement between what at the time were the largest buyer of crude oil (the United States) and the biggest exporter of the product (Saudi Arabia) created a paradigm that other importing and exporting nations quickly began to follow. Since that time, a strong majority of international oil trades have traditionally been conducted in U.S. currency, i.e., the “petrodollar.”

Today, even amid global tensions, shifting international trade arrangements and a spate of new deals to conduct transactions in competing currencies like the Russian rouble and the Chinese Yuan, a recent analysis by Ph.D. economist Anas Alhajji, managing partner of Energy Outlook Advisors, points out that fully 60% of official foreign exchange reserves conducted in Q1 2022 were transacted using U.S. dollars, according to IMF data.

Alhajji adds, “Yes, with the rise of the euro, Japan’s yen, and China’s yuan, the US dollar lost some ground, but here is the shocker: based on the most recent data from the International Monetary Fund (IMF), the US dollar’s share is where it was in 1995.”

What The Future Could Hold

Though Russia and a few other oil producing countries have pressured buyers to conduct trades in non-dollar currencies for years, there is no question that the divisive nature of Vladimir Putin’s war on Ukraine has caused such pressures to rise. In our interview in February, S&P Global Vice Chairman Daniel Yergin pointed out that just 37 of the world’s 195 countries are enforcing western sanctions applied to Russia, exacerbating already-extant international divisions.

Such divisions and pressures to trade outside the petrodollar seem likely to only continue to increase as Russia’s war lingers on without resolution. The ongoing rise of China as a geopolitical power and competitor to U.S. international dominance and the post-WWII liberal world order also seems certain to increase pressure on the current petrodollar system.

The heightening influence of the BRICS Alliance and its plans for expansion seems likely to also result in stronger competition to the U.S. dollar in international trades. BRICS members (Brazil, Russia, India, China and South Africa) voted last year to consider admitting new members, and Russian Foreign Minister Sergei Lavrov claimed recently that “more than a dozen” nations have since expressed an interest in joining the group.

Saudi Arabia has been frequently mentioned as a likely possibility to make that move. Other countries rumored to have expressed an interest include Egypt, Indonesia, Turkey, Thailand and the United Arab Emirates.

All of these factors could lead to declining influence of the U.S. and its currency in international dealings. Still, while recognizing all of these factors, Alhajji emphatically states that “the US dollar is losing ground, but it is not losing dominance.”

Bottom Line

There can be little doubt that the United States is in the process of gradually pulling back from the role it adopted at the end of WWII to become the world’s global policeman. Despite their major rhetorical differences, this gradual pulling back has been a prevailing feature of the presidencies of Barack Obama, Donald Trump and Joe Biden. It is not an accident that the influence of the petrodollar has declined apace with this U.S. pullback.

For now, though diminished, the petrodollar remains the dominant currency for trades in oil and petroleum products. But that status will continue to evolve along with the ongoing realignment of global trade and geopolitical alliances.