If Saudi Arabia were to break the tradition of pricing its oil in US dollars, as it is contemplating doing, others could well start to price oil in Chinese yuan or other currencies -- negatively affecting the US dollar's status and potentially the entire US economy. (Image source: iStock)
Saudi Arabia is considering selling oil to China -- which buys more than 25% of Saudi oil exports -- in exchange for yuan (China's currency), according to a recent report by the Wall Street Journal. The move would be unprecedented. Saudi Arabia, ever since its 1974 agreement with US President Richard Nixon, has been selling oil in exchange for US dollars.
The change, if realized, would be significant. The status of the US dollar, including as the world's reserve currency, depends on its dominance of global markets, especially the oil market, where 80% of sales are done in US dollars. If Saudi Arabia were to break the tradition of pricing its oil in dollars, as it is contemplating doing, others could well start to price oil in yuan or other currencies -- negatively affecting the US dollar's status and potentially the entire US economy.
Shortly after the news broke about the Chinese-Saudi talks on selling oil in yuan, according to Bloomberg, China's currency "surged". If Saudi Arabia were to sell its oil to China in yuan, it would be a victory for China, which is anyhow actively seeking to undermine the US dollar's global dominance.
"China must brace for a full-blown escalation of the struggle with the United States and prepare to gradually decouple the Chinese yuan from the US dollar," Zhou Li, a former deputy director of the Communist Party's International Liaison Department wrote in July 2020.
That Saudi Arabia now seems to be seriously considering selling its oil in yuan signifies the extent to which the Biden administration's Middle East policies have left countries such as Saudi Arabia hedging their bets on China as the ascendant power in the Middle East. China, on the other hand, is simply taking advantage of the current US administration's deprioritization of the region and its alienation of strategic US allies such as Saudi Arabia. That alienation has mainly come, according to reports, because of Saudi "security concerns" -- a diplomatic euphemism, presumably, for America's enabling Iran to acquire nuclear weapons.
This game-changer is doubtless seen by Saudi Arabia and other oil-rich Sunni Gulf states as a mortal danger. It was signaled through America's negotiations to reactivate what is reported to be a worse version of the 2015 JCPOA "nuclear deal," which the Trump administration pulled out of after evidence kept emerging of massive Iranian cheating. In addition, last year, the US officially took Yemen's Iranian-sponsored Houthi terrorist group off the list of Foreign Terrorist Organizations – and refused to put it back even after the Houthis resumed missile and drone attacks on their neighbors in the Gulf.
The vacuum that the US left behind -- the second one after Afghanistan -- is rapidly being filled by China. Not only is Saudi Arabia one of China's most important energy suppliers, but the kingdom is an important link in China's Belt and Road Initiative (BRI). The BRI is a gigantic global development project that Chinese President Xi Jinping launched in 2013 to build an economic and infrastructure network connecting Asia with Europe, Africa and beyond. The BRI seeks dramatically to enhance China's global influence from East Asia to Europe by making countries worldwide increasingly dependent on China. China has signed cooperation agreements with 19 Arab countries for construction projects under the BRI.
China is also Saudi Arabia's largest trading partner -- an arrangement that extends to military cooperation, which China's Minister of National Defense, Wei Fenghe and Saudi Arabia's Deputy Defense Minister, Khalid bin Salman, agreed to boost in a virtual meeting in January. China, which has been selling weapons to Saudi Arabia for years, has reportedly also helped the Saudis to start manufacturing their own ballistic missiles.
The news about the Saudis considering switching oil sales to the yuan came after US President Joe Biden found himself snubbed by Saudi Arabia, which refused to take his phone call to discuss the current energy crisis, the spiraling prices of oil, and apparently what was to be a request for the kingdom to pump more oil so that the US, which has plenty, would not have to. "There was some expectation of a phone call, but it didn't happen," a US official said about a planned conversation between Saudi Crown Prince Mohammed bin Salman and Biden. "It was part of turning on the spigot [of Saudi oil]."
OPEC, already in November, was showing perfunctory signs of being fed up with being betrayed by the US in favor of an expansionist Iran. "If you want more oil," OPEC said then, "pump it yourself." The snub clearly showed that America's standing in the Middle East, under Biden, has become -- unnecessarily -- immensely diminished.
"So the relationship is very strained," the Wall street Journal's Middle East correspondent Stephen Kalin said recently about the Saudi-US relationship.
"It's hard to really say exactly how bad it is. It might be the worst it's been in 20 years... What we hear from the Saudis is they feel like American politics is so unpredictable and so polarized that they can't really be sure whether the next administration is going to be friendly to them or hostile to them. Whereas with a place like China that has a leader who's been there for years, there's a bit more predictability, and that sort of matches the Saudi model of government, which obviously doesn't have elections and has a long sustained leadership."
While Saudi Arabia rebuffs the US president, it has invited President Xi Jinping to visit the kingdom in May. "Riyadh is planning to replicate the warm reception it gave to former President Donald Trump in 2017 when he visited the kingdom on his first trip abroad," according to the Wall Street Journal. "The crown prince and Xi are close friends and," according to one unnamed Saudi official, "both understand that there is huge potential for stronger ties... It is not just 'They buy oil from us and we buy weapons from them'." In January, Saudi Arabian Foreign Minister Faisal bin Farhan Al Saud visited China, where he met with Foreign Minister Wang Yi.
Saudi Arabia will be hosting the first China-Arab summit, scheduled to take place in Saudi Arabia later in 2022. "Going forward, China is ready to make good preparations for the China-Arab Summit, inject more momentum into bilateral ties and join hands to build a China-Arab community with a shared future in the new era," Zhao Lijian, spokesperson of China's Foreign Ministry, recently said.
In March 2021, Chinese Foreign Minister Wang Yi and Secretary-General of the League of Arab States, Ahmed Aboul Gheit, issued a joint statement, declaring that the China-Arab summit will, "constitute a qualitative leap to advance Arab-Chinese relations and the Arab-Chinese strategic partnership to broader horizons..." Both sides stressed "the necessity for a long-term cooperation with higher level and quality between China and Arab states, particularly in the fields of trade, investment, industry, transportation, energy, agriculture, tourism, culture, education, science, health, media, sports and so on." China is constantly looking to deepen relations with the Arab world. In August 2021, the fifth China-Arab States Expo took place in China; during it, agreements worth an estimated $24 billion in investments between China and Arab countries were made.
John Richardson is a researcher based in the United States.