A recent succession of oil deals has raised concerns in Washington that the supremacy of the dollar in oil transactions is threatened. Recent agreements made by countries like Saudi Arabia and China relating to the trade of crude and petroleum products could pose significant geopolitical consequences.
The petrodollar refers to the US dollar’s dominant role as the global reserve currency in the international oil trade. Oil-exporting countries receive payment for their oil exports in US dollars, which has strengthened the currency’s value and its demand worldwide.
Recently however, a number of countries have agreed to trade oil in other currencies as an alternative to the dollar. This has led to further debate about the status of the current world order. There has been a growing consensus in recent years that US power is waning to such a degree that the international system is transitioning from a unipolar world order to a multipolar order. Could the decline of the petrodollar be a signal that this transition is taking place?
Recent deals cast doubt on the future of the petrodollar
The US dollar is the standard currency used internationally to pay for oil. The origin of this practice is a deal struck between the US and Saudi Arabia in 1945. Since then, the majority of other oil-producing states have traded in dollars.
However, in recent months, several major deals and agreements have cast doubt on the longevity of the petrodollar, a cornerstone of US power and economic clout.
Now, several countries are weighing up the advantages and disadvantages of trading oil in other currencies, most consequentially, China’s yuan. During a visit in December to Riyadh, by Xi Jinping, the Chinese President made the case to Middle Eastern Gulf States that they would be better off conducting bilateral trade with the yuan.
Since then, there have been some significant indicators that the global economy could be heading towards de-dollarization.
Brazil and China, both members of the influential BRICS Alliance, revealed an agreement on March 28 to exclusively utilize their own currencies for future trade transactions. As Brazil’s top trading partner, China holds significant economic importance for the country.
That same month, various oil trading and banking sources reported that Indian customers primarily utilized non-dollar currencies, such as the United Arab Emirates dirham and more recently, the Russian rouble, to pay for Russian oil. Russia’s ability to export oil and gas since the imposition of American-led Western sanctions has become complicated, so this is less surprising.
After the US, Saudi Arabia is the world’s second largest producer of oil. For this reason, the relationship between the two countries is of paramount strategic importance for Washington.
However, Saudi Arabia has increasingly enertained the possibility of forging new economic and strategic partnerships, especially as the American military footprint in the region has waned.
Last week, Saudi Arabia announced its intention to join the Shanghai Cooperation Organization (SCO) as a “dialogue partner”, raising further concerns in Washington that Riyadh could fall within Beijing’s sphere of influence.
In reality, Saudi Arabia is probably trying to balance its relationships between the US and China to ensure that it is not overly dependent on either superpower. Nevertheless, there have been reports that Saudi Arabia is considering accepting yuan for Chinese oil sales rather than dollars, which would threaten the petrodollar, given the Kingdom’s prominent position in the oil market.
The declining petrodollar and the emergence of a multipolar world order
The decline of the petrodollar could have significant strategic consequences, particularly in terms of the global balance of power. As the world’s reserve currency, the US dollar has played a dominant role in the global financial system, giving the United States significant geopolitical influence. However, if the petrodollar were to decline, this could signal a shift away from the US-dominated financial system towards a more multipolar world order.
Since the end of the Cold War and collapse of the Soviet Union, the US has enjoyed global supremacy, sitting atop a unipolar world order. However, a sufficient decline in US power, which could in part be facilitated by the de-dollarization of the global economy, could create a shift to a multipolar world order in which there are multiple poles of power on the world stage.
Many International Relations scholars already think that the world is defined by multipolarity and that the American “unipolar moment” has already come to an end. Of course, the decline of the petrodollar would not necessarily be enough on its own to cause a dramatic shift in the balance of global power, but it could act as the proverbial canary in the coal mine.