Why the coming face-off between the Petro-Dollar and Petro-Yuan?
Many are asking about the recent news around strengthening relations between Saudi Arabia, China and Russia. Candidly, geopolitics around the world today post Ukrainian war are especially complex and far out of our expertise and scope for this letter. However, it’s not wrong to question the financial affects as political maneuvering and protest are manifested in certain financial and global commerce linkages.
The Petro-dollar is one linkage that countries like the US, Saudi Arabia, and China are especially interested in. It was 50 years ago that “Petrodollars” came to explain the US dollar’s status and role as the principal currency for the exchange and store of value for oil producers and export revenues. Most have come to see the reserve currency status for the dollar as the economic and political dominance of the US starting in the 70s.
With this backdrop and through the lens of “economic and political dominance” it should be easier to understand, if not obvious, that things have changed around the globe from the 70s to today. Globalization and specifically in China, the concept of world “dominance” has changed and that would undoubtedly affect “Petrodollars” if not already affecting the level that the US dollar, at least that is the perception.
However, over the last 2 decades there has been no shift in the currency composition of global reserves, about 80% is the US dollar and Euro. So, despite the cries that the sky is falling for the US dollar, chicken little remains untouched by falling dollar fragments.
That said, it’s the future that will determine the shift in composition of bank reserve currencies and any factors that could affect those shifts shouldn’t be taken lightly, but for today the US dollar’s status as reserve currency is not threatened.
This gets us back to the recent news around the prospect of Petro-Yuan, which could be viewed, if at all, as the tail wagging the dog. A very small tail on a very large dog. One might not even really classify the action between Saudi Arabia and China regarding oil payments as De-dollarization given the minute affect. If we are being honest, this falls on the strategic considerations regarding the US dollar and is a clap back on the actual strength of the dollar. Post covid and US monetary policy of zero rates, the dollar has been an effective weapon against the likes of Russia and inflation, inflation that we have effectively exported to other countries. For Russia, the US has seized any dollar assets, and for Saudi Arabia and China, US relations have hit rock bottom. Too much to talk about here but Yemen, Iran, Taiwan just to tease a few hot buttons. It’s no wonder that other countries question their continuing role and cost of supporting the US’s dominance as the reserve currency.
Petro-yuan is nice news fodder, but any real conversation would start with Petro-BRIC and the reality is there is no stomach for anything but the Petro-Dollar at this time. Lastly, there are far bigger factors that might affect the reserve currency composition, Petro-dollar being the least. International finance particularly debt obligations, trade links and trade agreements, credibility and payment technologies. One final comment around credibility which speaks to Covid and how countries handled covid policies, clearly China struggled and whole global supply chains were disrupted. For now, we see no threat to the face of the global reserve currency, still the winner, the US dollar.
