The myth of the inevitable rise of a petroyuan

Astonishing as it is, the narrative is an illusion.

Ask quietly in government circles in Riyadh, Abu Dhabi, Kuwait City or Doha about the petroyuan, and the response — even in the weeks following Xi’s visit to Riyadh — is unanimous: the petrodollar is here to stay. On a recent trip to the region, I didn’t hear a single official talking seriously about making preparations to introduce a new currency to the mix. The answers sound a lot like this: What’s in it for us? The greenback is freely convertible, the yuan isn’t; the dollar is liquid, the yuan isn’t. That’s the polite version; the more candid answers sounded even more emphatic about the absurdity of turning to a managed currency produced by an opaque and unpredictable financial machine.

As in every conspiracy, there’s a grain of truth in the petroyuan tale, however. Xi did encourage the region to embrace the yuan for oil trade. But rather than pricing oil in yuan, as many had expected, Xi simply asked Middle East producers to accept payments in yuan.

Middle East officials were lukewarm at best. In public, they are open to debate the merits, but not much more. “There are no issues with discussing how we settle our trade arrangements, whether it is in the US dollar, whether it is the euro, whether it is the Saudi riyal,” Saudi Finance Minister Mohammed Al-Jadaan said last month. Thani Al Zeyoudi, the Emirati trade minister, said his country was prepared to discuss settling trade in different currencies, but only for “non-oil” deals.

In the region, the petroyuan is also seen as a door that, once opened, would invite followers. India may want a petrorupee, officials say; Japan, South Korea and Taiwan could seek similar arrangements. Although China is Saudi Arabia’s largest oil customer, taking roughly 26% of its oil exports, the combination of Japan and South Korea surpasses that share, reaching 28%. Add Taiwan, and the trio account for nearly one-third of Saudi petroleum exports. If you say “yes” to the petroyuan, how can you refuse, say, the petroyen and the petrowon?

Going beyond settling oil trade invoices in yuan is even harder. The appetite among OPEC producers to price oil in yuan using a Chinese exchange is almost nil. Middle Eastern national oil companies closely watch how Beijing tries to manipulate local commodity prices such as iron ore, cotton, coal or grains every time prices rise above its pain threshold. Having spent 60 years building a formidable cartel, why would Middle East nations cede pricing power to China?

Beyond Chinese capital controls, Middle East oil-producing nations have other reasons to stick to the dollar. A crucial one is that most of their currencies are pegged to the greenback, requiring a constant influx of dollars to support the arrangement. Those savings are held in dollar accounts, so Middle East countries have an interest in keeping the dollar strong.

Petroyuan fans play down the importance of the currency pegs. They do have a point, as those pegs can be abandoned or, at least, tweaked. But I haven’t seen any signs that’s about to happen. The other argument in favor of the petroyuan is that the US has weaponized the dollar via oil sanctions on Venezuela, Russia and Iran, making an alternative payment not only likely but necessary. Perhaps, but this isn’t the first time the US has imposed oil sanctions, and the dollar hasn’t suffered. Libya demanded — and got — payment in European currencies in the 1990s, as did Iraq.

Ironically, the only new petrocurrency to emerge of late has been the dirham of the United Arab Emirates. India is using it to settle some oil transactions with Russia, bypassing US sanctions. But for the past 25 years, the dirham has been pegged to the US dollar — another indication that the petrodollar remains the only petrocurrency that really matters.

Javier Blas is a Bloomberg Opinion columnist covering energy and commodities. Views are personal and do not represent the stand of this publication.

Credit: Bloomberg