Academic Paper: Will the Petroyuan be an Alternative to the Petrodollar? (Arabic)

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Al-Zaytouna Centre for Studies and Consultations has published an Arabic academic paper entitled “Will the Petroyuan be an Alternative to the Petrodollar?,” which studies the future of the petrodollar agreement, and the possibility of having the petroyuan as an alternative to the it.

The paper was prepared by Dr. Muhammad Ibrahim Miqdad, professor of economics at the Islamic University of Gaza and the head of the Palestinian Economists Syndicate; and Muhammad Abdul Hadi Nassr, a PhD student in economics and director of the Studies and Statistics Department at the Ministry of Social Development in Gaza.

The authors began explaining that since 1973, which was characterized by a sharp rise in oil prices, the petrodollar system appeared. In 1974, the Nixon administration made a deal with KSA to buy oil exclusively in dollars, while providing security guarantees to KSA. The huge sums produced by the energy markets were invested mainly in US markets, which was for the advantage of the US economy, while European partners were greatly frustrated. In 1999, the Euro was created and proved itself as a global currency, but it could not compete with the New York markets due to the lack of a unified European treasury. Consequently, the euro could not move the dollar from its position as the main reserve and exchange currency in the world.

This study explains how after the US-China trade war began in 2018, the BRICS countries tried to get rid of the dollar in their inter-trade dealings, while China also started selling and valuing petroleum in Chinese Yuan. There is talk now that economic relations between China and KSA will develop, by accepting China to pay yuan for the oil imports from KSA. This will eventually break out the dominance of the US dollar on the global oil markets, and cancel the petrodollar agreement. Since early 2022, the Chinese Central Bank has been implementing plans to strengthen the position of the yuan in international financial transactions, where instead of focusing only on pricing imported goods and services, such as oil and others, in yuan, it is following a dual track by also facilitating foreign investors’ access to Chinese stock markets. It is also working on rising yuan’s share of global currency transactions for trade finance.

However, the authors believe that the use of the yuan in the oil and gas market is still limited so far and does not significantly affect the dollar, but China’s steps are still causing concerns to the US, which is closely following Chinese expansion in its traditional areas of influence in the region. If the Gulf countries, especially KSA, decide to abandon pricing oil in dollars and turn to the yuan, and Qatar does the same with its liquefied gas, this will be a blow to the dollar, and it would break its dominance in the international currency market. The seriousness of this matter lies in the fact that China is globally the largest importer of oil and gas and the second largest consumer, while KSA is its largest exporter, and Qatar is the second largest exporter of liquefied gas.

Based on the above developments, the study suggests three different scenarios regarding the transition to petroyuan. First, the US dollar would continue dominating oil transactions in the short and medium term. Second, yuan would dominate oil transactions in the medium term. The third scenario assumes the end of the dollar’s dominance in the medium term, and a group of currencies would replace it in oil transactions.

The paper considers the third scenario the most probable one, where the dollar would continue to dominate in the short term, and starts to decline in the medium term, while a group of currencies would have their different shares in oil transactions.

The authors see that this scenario is supported by the fact that the greenback is still globally the most accepted one, while the share of yuan reserves held by global central banks is still very small. In the near future, there is no currency that can replace the dollar, because it must be stable, and this requires a central bank that enjoys more credibility than the others, and a government that can meet its financial obligations in the long run. The authors see that China has many years ahead to build an economy, power and reputation that would be in parallel with the US economy and power, while the Eurozone suffers from deficit and indebtedness, and the divergence of interests in foreign policies.

The study concludes that the US behavior and the Chinese openness to different countries are the most important defining factors of how much the dollar will continue to dominate in the foreseeable future. Furthermore, if dramatic shifts happen, fundamental changes with regard to dependence on the dollar will be witnessed. These shifts depend on the countries’ boldness in shifting away from the dollar, and their ability to make the accompanyıng technical and logistical changes.

The paper concludes that the hegemony of the dollar must not be the world’s constant destiny, for its continuation has greatly strengthened the US military and political dominance and did not serve the international interest. Moreover, it has enabled the US to impose unjust sanctions with the petrodollar group on Russia, and before it on Iran and many countries. As a result, many countries will exert concerted efforts to find alternative system. However, switching from petrodollar to petroyuan or any other international system is neither easy nor a spontaneous transformation, but rather a transformation that requires difficult international efforts.