“War could fundamentally change the global economic and geopolitical order if energy trade changes, supply chains reconfigure, payment networks fragment, and countries rethink their foreign exchange reserves,” the International Monetary Fund (IMF) warned on Tuesday. He didn’t really believe. According to the Wall Street Journal, China and Saudi Arabia are exploring the possibility of paying in yuan for the purchase of Saudi oil.
The rate is far from marginal and can speed up the movement. About 25% of China’s oil imports, out of a total of about 10.5 million barrels per day (bpd) (according to the latest OPEC monthly report), comes from Saudi Arabia, the rest comes mainly from Russia, Iraq and Angola. In addition, the Kingdom, which exports an average of 6.2 million barrels per day (mbd), is also one of the main suppliers of crude oil to Japan and India.
fracture line
This desire is not new, but it takes on a new dimension with the war in Ukraine, which draws a dividing line between Western and developing countries. Because even if they do not approve of the Russian invasion, the developing countries do not want to join the position of the United States and Europe.
After the sanctions imposed on Venezuela, Iran, and now Russia, they have sought to be less dependent on the United States. For the Saudis, distrust is even older. Since Crown Prince Mohammed bin Salman, the leader of the regime, was ostracized by the Biden administration, which accuses him of masterminding the assassination of dissident journalist Jamal Kagoshi, relations between Washington and Riyadh have weakened. Thus, Joe Biden’s recent call for Saudi Arabia to increase production to bring down the price of a barrel of crude oil that has topped $100 has remained a dead letter.
Riyadh also criticizes the United States for not supporting the coalition formed with the United Arab Emirates, which has been mired in civil war in Yemen since 2015, where it is fighting an Iranian-backed Houthi uprising. At the end of 2021, according to a report prepared by the UN, this war has claimed the lives of 377,000 people, including 150,000 as a result of hostilities, the rest as a result of hunger and disease. In addition to the loss of life, this has a financial cost to Saudi Arabia that amounts to tens of billions of dollars.
Moreover, the Saudi kingdom feels less and less involved in the system created in 1974 – after the end of the Bretton Woods agreements and the oil shock – by the administration of Richard Nixon. In exchange for their security, guaranteed by the United States, the Persian Gulf oil monarchies pledged to conduct transactions in dollars. Thus, producing countries accumulated foreign exchange reserves in dollars, and consuming countries had to receive dollars to purchase oil, which strengthened the role of the dollar as a settlement currency. With their petrodollars, the Persian Gulf monarchies bought US Treasury bonds, thus financing the US budget deficit.
The United States aims to become the world’s largest producer
However, the oil market has changed. OPEC has united Russia and other exporting countries in OPEC+ to better control the evolution of oil prices. At the same time, the United States is vying with Saudi Arabia and Russia for the title of the world’s leading oil producer, thanks to the development of “fracking” and the permission granted by Donald Trump since the beginning of his presidency to oil companies to explore. and drilling on American soil. As a result, the United States, which imported 2 million barrels a day of Saudi oil in the early 1990s, fell to less than 500,000 barrels a day in December 2021, according to the US Energy Information Agency. A figure that should decrease in the future if sanctions against Venezuela are lifted.
Even if more than 80% of oil contracts are still denominated in dollars at the moment, more and more developing countries no longer hesitate to do without them, as evidenced by India’s purchase of Russian oil in a ruble/rupee deal.
The “exorbitant privilege” of the dollar is also based on the extraterritoriality of US law, which allows the US Department of Justice to prosecute a foreign company outside the US on the sole basis that it conducted its business in dollars. Thus, the French bank BNP Paribas had to pay a $9 billion fine for conducting transactions with countries such as Sudan, Iran or Cuba, which are under US sanctions.
Finally, one of the beneficiaries of this movement could be the euro, and Russia and China have reduced their dependence on the dollar in recent years, replacing it with the euro and gold. If Beijing has never concealed its intention to make the yuan a reserve currency and has already achieved certain concessions in this direction from the International Monetary Fund (IMF), then it is disadvantaged, but disadvantaged by the fact that it remains under Beijing’s political influence.
Xi Jinping’s visit to Saudi Arabia
Besides the issue of currency, emerging economies are accelerating joint investment projects. Last month, China and Russia signed a contract to build a gas pipeline between the two countries. Last week, a delegation from Saudi Arabia toured Asia, culminating in picking up orders from Pakistan, India and China. Among the 35 economic cooperation agreements signed with Beijing, totaling $28 billion, according to the Saudi news agency SPA, is a project to build a $10 billion oil refinery and petrochemical complex.
Royal Oil Company Aramco will form a joint venture with Chinese defense conglomerate Norinco, which is engaged in oil operations, to develop a refinery complex – with a capacity of 300,000 barrels per day – and petrochemicals in the city of Panjin, in Liaoning province in the northeast of the country, near the border with North China. Korea. Aramco will supply up to 70% of the oil from the complex, which is expected to start operating in 2024.
As a sign of this strengthening of relations between the two countries, at the invitation of the king, Chinese President Xi Jinping will make an official visit to the kingdom, probably in May, after the end of Ramadan.
Robert Jules
March 16, 2022, 6:22 pm