As the oil market fixates on debating whether or not the Chinese reopening will lead to a demand surge in overall demand for oil barrels, and the latest news on U.S. regional banking woes continues to capture attention, some interesting developments seem to have been missed by the bigger media.
A crisis always gives way to opportunities -- and stress even more so. Since Covid, we have seen many countries and leaders use this crisis to their advantage, paving the way forward for themselves. The invasion of Ukraine has certainly expedited that for a host of countries, mostly Russia. The war has single handily forced or compelled them to throw themselves into the arms of China and India, as their future now lies in the hands of their consumption.
When the U.S. came off the gold standard in 1971, the petrodollar came into existence. To put it simply, the petrodollar system stands for U.S. dollars being used as means of payment for the oil-exporting nations, or the settlement currency in exchange for the sale of oil, petrol. This was the system put in place with the OPEC nations and most of the world as the U.S. dollar was the main currency used to settle this trade and the most reliable one as well.
Today that notion is being challenged.
Things do not change overnight, of course, but certain episodes do accelerate it. The big announcement by the Saudi Finance Minster at Davos that they would consider payment for their oil in yuan was a huge game changer. Just the mere mention of it, let alone the implications for the future. And why would they not as one of the world's biggest consumers of oil (China) needs to buy oil from one of the world's largest suppliers (Saudi/OPEC and Russia)?
Why must these consumers need to borrow dollars and pay for that oil to only sell them back out again? It would be easier to cut out the middle man entirely. The war in Ukraine, especially with Russia being kicked out of the swift system and having its assets frozen, has set this in motion.
The global oil market is about $3 trillion in size, flowing approximately 100 million barrels per day. China's annual oil demand is about 10 mbpd roughly speaking, but its growth is one of the fastest, including India. These are not inconsequential numbers as if even just 10% of this moves outside of U.S. dollars, that is a significant change from a world entirely dependent on the dollar.
To put this in perspective, with the rise of the BRIC nations (Brazil, Russia, India and China), Europe is moving even closer to the U.S. (or rather has no choice) as things shift toward a "multi-polar" world. "NATO members along with Japan and Korea in the Dollar zone with about 1 billion people and a GDP of about $50 trillion and the rest of the world as a non $ zone containing the other 7 billion people with the equivalent GDP, but where all the growth is," according to Market Thinking.
The weekend news of Saudi Arabia announcing some big deals cements their relationship with China even further. Saudi Aramco just announced plans this week to build a $10 billion refining and petrochemical complex in China's northeast over the next three years. According to the Aramco news release, the complex will have a capacity of 300,000 barrels of crude daily, and Aramco will supply 201,000 barrels per day to the facility.
In addition to this, Aramco also announced that they would buy a 10% stake in a giant oil complex in China for 24.6 billion yuan ($3.6 billion), in exchange for securing sales to one of the country's largest refineries. Aramco will also supply 480,000 barrels of crude oil per day to Rongsheng Petrochemical Co.'s refinery and is providing credit of $800 million for the purchase, according to the statement.
Let's not fool ourselves, however, the world is not ready today for a move away from the dollar entirely. Mostly because there is no other "safe" alternative out there for now. But the wheels of change are in motion as we are seeing global alliances shifting.
In the meantime, OPEC and Middle East states cannot turn their backs away from the dollar as there is too much at stake. Still, they are surely diversifying and hedging themselves to protect their future ambitions.
One thing we have learned form the Ukraine War is that no country or continent should ever be dependent on any single country for its resource needs. Europe knows this all too well and will be paying the price for this for years to come.
