Move to force Saudi Arabia to accept Yuan in exchange for oil could have a big impact on the US Dollar and global economy.
A top economist says China is moving to encourage Saudi Arabia to trade oil in Yuan, a shift that would break the US Petrodollar and potentially shift economic power further towards China.
In 1974, US President Richard Nixon created the situation referred to as the “Petrodollar” when he signed an agreement with the leaders of Saudi Arabia to ensure that the country only accepts US dollars for oil, regardless of which country was purchasing it. This dramatically strengthens the US Dollar, forcing countries to buy American currency to get Saudi oil, making it far easier for the United States to fund massive budget deficits and trade deficits.
China is already the largest oil importer in the world, and this gives them growing leverage over Saudi Arabia.
As noted by economist Carl Weinberg, Saudi Arabia has “to pay attention to this because even as much as one or two years from now, Chinese demand will dwarf U.S. demand. I believe that yuan pricing of oil is coming and as soon as the Saudis move to accept it — as the Chinese will compel them to do — then the rest of the oil market will move along with them.”
This move could end the role of the US dollar as the world’s reserve currency, something some nations are already preparing for.
As noted in a CNBC report, “In recent years, several nations opposed to the dollar being the world’s reserve currency have progressively sought to try and abandon it. For instance, Russia and China have sought to operate in a non-dollar environment when trading oil. Both countries have also increased their efforts to mine and acquire physical gold if, or perhaps when, the dollar collapses.”
The end of the US Dollar as the world’s reserve currency will have a big impact on the global economy. The US will find it more difficult to fund budget deficits at the low interest rates they currently enjoy. They will be less able to afford imports, though this could be balanced out by the fact that US exports will become more affordable.
China will also benefit, as Weinberg notes:
“Moving oil trade out of dollars into yuan will take right now between $600 billion and $800 billion worth of transactions out of the dollar… (That) means a stronger demand for things in China, whether it’s securities or whether it’s goods and services. It is a growth plus for China and that’s why they want this to happen.”
Due to our heavy trade with the United States, Canada would be impacted by any weakening of the US economy. However, the end of the petrodollar means the US would be likely to shift towards more North American energy, creating a strong opportunity for our Canadian energy industry to grow. Additionally, the Canadian Dollar would likely weaken along with the US Dollar, making our export sector stronger, at the expense of more affordable imports.
While the US would take an economic hit in the short term if the petrodollar fell, it could be beneficial for them in the long-term, as the petrodollar masks an economy based on cheap debt and massive trade deficits. This inherent weakness is hidden for now, but the end of the petrodollar would reveal it, forcing the US to strengthen domestic production and exports, and confront their debt problem. Despite serious problems, America remains an innovative and highly-productive economy, and the end of the petrodollar won’t change that in the long-term.
Of course, the short term consequences could be big, and Canada should be prepared. As I’ve said before, by strengthening our exports, supporting the energy industry, cutting taxes, reducing regulations, and building up the military, we can strengthen our domestic economy and be less vulnerable to changing global economic conditions. We don’t have to sit back and just hope everything works out. With strong leadership, we could be a much wealthier and more powerful country, regardless of what happens to the petrodollar.