It seems the entire world and their leaders have awoken from a deep slumber after two long Covid lockdown years, and are starting to put in place all the things they had envisioned over their respective terms. As the world was just coming to an end with the entire Covid mandated vaccine boosters and endless testing, perhaps returning to some sort of normalcy similar to pre-Covid times, we have been thrown yet another crisis.
It seems the world leaders, and governments over can only function from one crisis to another in order to justify their horrendous policies and lobby their agendas. After all, how can they control the population or the narrative. Religion used to be opium of the people, today it is fear. Fear alone is allowing people to give up their rights for the sake of "national security", or at least that is what they are being told.
If it was not enough to manage the Zelentskyy/Putin headlines on an hourly basis, mixed with commodity shorts being squeezed on billions in margin calls as institutions puked assets. Yesterday afternoon another bomb, proverbially speaking thankfully, was dropped on the markets when WSJ released a story that Saudi Arabia was considering trading oil in yuan for its sales to China. Saudi Arabia is one of the top three producers of oil along with Russia and the U.S. China is the world's largest consumer of oil, so it seems a direct match to trade in yuan, instead of the dollar.
The Petrodollar system has been put in place since the 70s when the U.S. was a net importer of oil. A natural relationship was formed between Saudi Arabia and the U.S., where the former would sell its oil in exchange for the dollars earned to be reinvested into the U.S. Treasury market and security promises. The dollar has been the world's reserve currency and the currency basis for all commodities that have to be bought and sold in dollars.
Countries that buy oil would need to buy dollars via their local currency first to then buy the commodity, only to sell it back and receive the dollars and exchange it back to their local currency. This consistent demand for dollar is one of the reasons why it has maintained that reserve status. But if the bigger players decide to use another method of payment, then the system is at risk of breaking down. Wars have been fought to keep this system in place or to dissuade any member from trying to break away.
Following Russia's attack of Ukraine, Russian banks have now been sanctioned out of the SWIFT system which makes it very hard for them to buy and sell dollars in exchange for their commodities, namely oil and gas more importantly. But if Russia produces about 10 mpbd and China needs about 10 mbpd, it seems that there really should not be a need for any dollars in the first place. So why should the bigger powers succumb to a system that can be switched off and they ostracized at the drop of a hat. This war has shown China just that. They have been preparing their own version of SWIFT called the CHIPS system but the notional value of transactions is minimal compared to the SWIFT.
Saudi Arabia and the region has deep ties with the U.S. But the recent Biden administration has not done itself any favors in keeping those ties intact. President Trump was a lot better at being diplomatic while looking away for the greater good, but President Biden and the Democratic party have been more vocal about taking a tougher stance on them, not supporting their local war in Yemen, nor protecting their stance against Iran and continuous lawsuits still in place against them. The most recent comment from MBS, "simply, I do not care", when asked whether Biden misunderstood him, is quite significant.
The U.S. hegemony has been under threat for years now. But the pieces are all falling in place slowly. It is a matter of time before it all rolls over like most empires. Saudi Arabia has dealt exclusively in dollars for their oil. They have been in talks for years to trade in yuan. But make no mistake, China is exceptionally smart being the world's largest buyer of all assets, they can choose the right time to place conditional demands in exchange for stability, trade deals, and trading relationships. The entire region and its leaders are all used to getting subsides and payments in dollars, which allows them to be able to spend it abroad. Will the yuan be seen as a "safe currency" for them to still be able to do so?
China is trying very hard to maintain stability in its yuan but it is far from a reserve currency, let alone a transparent one. If Saudi Arabia were to go through with this, it would mark a significant step away from historical allegiances and the U.S. dollar/SWIFT system would be done. Commodities as we know it, will cease to exist the way we have known for the past 50 years, with correlations breaking down as the dollar will cease to be its driving force. Perhaps a slow move to a basket of select currencies like euro, yen, yuan, and others would be a more suitable alternative to trade oil and commodities. But make no mistake, the wheels of change are already set in motion. Covid and Ukraine have just brought that time line closer to the dollar's ultimate demise.
