Many OPEC countries have been discussing the use of or utilizing gold or other currencies in lieu of dollars. However, they are met with a lot of opposition. China is aware of this and has been working on setting an alternative to the petrodollar, the petroyuan.
Why is the Petrodollar So Important To The US?
The petrodollar is a considerable advantage over America. The US, in relation to Saudi Arabia and other countries as they, require dollars to purchase the commodity. Because the majority of global oil sales are conducted using dollars, OPEC members receive substantial amounts of US dollars. These dollars are put back into the American economy. The US has utilized the petrodollar to sway nations that do not conform to US international policy by imposing embargoes and sanctions.
Countries that sell their oil for dollars must reinvest the currency into the American fund of investment. For instance, Saudi Arabia sells X amount of oil in exchange for Y amount in US dollars. Saudi Arabia sends the money to the US Treasury, which then reinvests the funds into a specific fund. The funds’ profits fund is used to pay American contractors to construct structures in Saudi Arabia. This gives the US an advantage in terms of economics over other countries.
New Economic Partners
In the meantime, China has been working towards promoting its own currency to compete with the dollar. In light of the recent conflict with the King of Saudi Arabia and the Biden administration, Saudi Arabia seems to seek to establish an economic partnership with a new partner, which China might be willing to accept. Accepting the sale of oil using yuans could elevate China to become the new world’s dominant power.
Another reason China is seeking a close relationship in conjunction with Saudi Arabia is to create an independent financial system that the West does not control. Many countries have experienced severe economic sanctions for implementing policies that are not favorable to the US. China could avert the consequences of economic sanctions by establishing a financial network like SWIFT in which member countries operate in a different area than the US zone of influence.
What is The US Doing to Avoid A Petroyuan?
US officials are dissatisfied with the latest developments, yet they are doing nothing to halt this escalating sequence of things. Additionally, Saudi Arabian officials appear to be extremely unhappy with the US-mediated Iran nuclear deal threatening to limit the country’s influence within the region. The threat of a Chinese Petro currency be a catalyst to bring the US back to the Saudi negotiation table, or is it already too far too late? What is the duration for which the dollar will be the reserve currency for loans? Given the current turmoil, it would be prudent to advise the US to be cautious in the coming months.