A 'Petroyuan' Could Further Shake the Dollar's Dominance

As extraordinary penalties on Russia stoke global appetites for currency alternatives, Saudi-Chinese talks 'accelerate.'

According to the Wall Street Journal, China and Saudi Arabia have "advanced" ongoing talks to price oil contracts in yuan rather than dollars, indicating that the dollar-centric global financial system is under great duress.

The dollar's continued fall as a global trading and reserve tool has substantial ramifications for the US economy, and it may make neutral or non-state monetary networks more valuable to a broader range of participants.

Importantly, the "petroyuan" conversations have been underway for six years, rather than being precipitated by events in Ukraine. According to the Journal, they have been expedited not by Russia's incursion, but by recent US Middle East policy. This includes a military pullout from Afghanistan and a more robust White House condemnation of the suspected Saudi-planned murder of journalist Jamal Khashoggi.

The United States' backing for the regional political objectives of OPEC members was critical to the agreement that standardized the dollar pricing of oil in the 1970s, so signs of a pullback should come as no surprise. In addition, the United States consumes barely one-quarter as much Middle Eastern oil as it did when the petrodollar system was founded, but Chinese imports have increased. In many ways, this is a good thing - Saudi Arabia is a brutally repressive monarchy, no less politically toxic than Vladimir Putin's Russia, and the United States' readiness to walk away from a dangerously intimate relationship there is good for the globe.

However, the continual transition poses a fundamental structural issue. The dollarization of OPEC oil sales plays a significant role in uniting global markets around a single currency. If the United States loosens its links to OPEC, both this major dollar-trading node and the broader dollar network will almost certainly divide and collapse.

The announcement comes on the heels of extraordinary sanctions imposed on Russia, including the freezing of central bank reserves and the seizure of US-held central bank money in Taliban-controlled Afghanistan.

These actions send a clear message to other dissenters or opponents of the US-Europe power nexus that they cannot rely on the good faith of Western banking regulators. That doesn't imply the yuan is suddenly a greater instrument; it has its own set of issues. However, the tremendous deterioration of the dollar's immutability makes any dollar alternative all the more enticing.

There have been quick assurances that the Saudi threat is only a strategic ploy against the United States, or that a limited petroyuan trade would not pose a challenge to dollar dominance.

This is correct in the sense that the Titanic did not sink after taking on the first thousand gallons of water. What matters is not the water, but the holes that allow it to pass through the hull of the USS Dollar. Until those flaws and pressures are addressed, each pinprick makes the dollar's fate less clear.

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