by Philip Pilkington
Wednesday, 16
March 2022
Analysis
16:18

A Saudi-China oil deal is a warning shot to the West

Selling oil in renminbi instead of dollars will undermine US hegemony
by Philip Pilkington
Credit: Getty

Yesterday the Wall Street Journal reported that the Chinese were courting the Saudis with the intention of buying their oil with Chinese renminbi. This is a hugely significant moment.

Today around 80% of oil contracts are transacted in dollars. This has given rise to a phenomenon called ‘petrodollars’, which are dollars bought to engage in oil trade and act as a sort of backstop on the value of the American currency. The US dollar does not get all its value from petrodollars — it is also propped up by Chinese purchases of treasury bonds and global purchases of US stocks — but petrodollars are seen as a buyer of last resort.

If the Chinese manage to convince the Saudis to sell them oil in renminbi, then, if we also include Russia, countries that produce nearly 30% of global oil contracts will be open to renminbi contracts. If we include Iran and Iraq that number rises to just over 38%. Smaller oil producers will likely follow suit.

Why are the Saudis open to this? Some of it is economic: they want to build ties with the Chinese economy. But some of it is due to longstanding cracks in the US-Saudi alliance. In recent years the Saudis have been alienated by the US’s reluctance to back them in the brutal Saudi-Yemini war and by the Iran nuclear deal. The Western reaction to the killing of the journalist Jamal Khashoggi also enraged key players in the Saudi establishment, and was probably the final nail in the coffin of a special relationship between the US and Saudi Arabia that stretches back to the Nixon administration.

Following the events of the past two weeks, this latest news seems to be part of emerging pattern. It is likely that the Chinese and the Russians have put together a concerted plan to carve out a sphere of global influence that challenges Western hegemony. The invasion of Ukraine may have just been a trigger to set the plan in motion.

The news out of Saudi Arabia is evidence that the Russians and the Chinese may have calculated correctly. This should serve as a wake-up call to the West, which has been more interested in moral posturing than strategic thinking. As grotesque as the Khashoggi killing was, history will likely record the response to it as a fruitless and self-indulgent tantrum.

With Boris Johnson is travelling to Riyadh today, hopefully that is a sign that he and other Western leaders are willing to make deals with regimes that do not share our values. Given that the UK will be trying to wean itself off from Russian oil and gas over the coming years, strengthening ties with the Saudis will be even more important.

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Prashant Kotak
Prashant Kotak
4 months ago

Don’t see it myself it somehow. Would only make sense getting paid in Renminbi if they were confident to ferret away their wealth in China, So not unless the Saudis intend buying luxury real estate and other assets in Beijing and Shenzhen instead of in the West. Do you think they (or anyone) would trust the Chinese to not simply sieze their assets some point in the future, under whatever pretext?

Last edited 4 months ago by Prashant Kotak
Warren T
Warren T
4 months ago
Reply to  Prashant Kotak

I would agree with you, but considering the West’s recent decision to sanction Russia to death economically, perhaps not just the camel’s nose is in the tent now.

R Wright
R Wright
4 months ago
Reply to  Prashant Kotak

If the Saudis were silly enough to put their money into real estate in a country infamous for having tower blocks fall over in a strong gust, then they’re clearly not the economic geniuses everyone seems to believe they are.

Jeff Carr
Jeff Carr
4 months ago
Reply to  Prashant Kotak

I think you may find that Saudi Arabia like many other countries imports a wide range of industrial and consumer products from China which could be purchased in Renminbi. They are also investing in high speed trains that may be Chinese. It may make sense to the Saudis to spread their currency risk. After all the US domestic budget has been in deficit for many years and they run an annual trade deficit approaching $900bn. But these indicators don’t seem to matter as long as you can borrow more.

Prashant Kotak
Prashant Kotak
4 months ago
Reply to  Jeff Carr

In the round, sure, but at the level of individual companies? Unless you are a company doing bilateral trade (here’s some of our stuff, can we have some of yours in exchange), why would you want to trade in Renminbi? If a private Saudi oil company gets paid in Chinese currency when they sell but they buy their stuff from other places, where is the advantage over the considerable risk? If instead you are a state (or rather crown) owned oil company with a bigger picture of goods and services flowing both ways between countries, you may as well dispense completely with the intermediary of a currency, and do direct barter: here’s some oil, can you give us some cheap Chinese tat plus a bunch of more useful stuff.

Last edited 4 months ago by Prashant Kotak
Matt Hindman
Matt Hindman
4 months ago

Welcome to cold blooded geopolitical reality! I have still yet to see Washington or the mainstream media even touching this topic. Then again, when I mentioned this to people I know the reaction was “what are petrodollars?”

Peter LR
Peter LR
4 months ago
Reply to  Matt Hindman

It was on GBNews 2 days ago, Matt.

Matt Hindman
Matt Hindman
4 months ago
Reply to  Peter LR

You do realize I am an American and do not get United Kingdom television?

Franz Von Peppercorn
Franz Von Peppercorn
4 months ago
Reply to  Matt Hindman

Why would he realise that?

Matt Hindman
Matt Hindman
4 months ago

I have been around here for a while now and I specifically mentioned Washington instead of London.

Last edited 4 months ago by Matt Hindman
Charles Hedges
Charles Hedges
4 months ago
Reply to  Matt Hindman

The last presidents to understand geopolitics were probably Jack Kennedy and Regan in Britain the last Prime Minister was Thatcher.

David Jennings
David Jennings
4 months ago
Reply to  Charles Hedges

Not so sure of JFK (a very spotty record) but certainly you could add George Bush Sr. to the list.

Ethniciodo Rodenydo
Ethniciodo Rodenydo
4 months ago
Reply to  Charles Hedges

You forgot Nixon

J Bryant
J Bryant
4 months ago

As I followed the coverage of the Ukraine war I started to wonder what key lessons China would learn. My sense was they’d now want to make themselves as independent as possible of US-controlled financial markets and trading mechanisms (e.g., the swift system) to avoid possible sanctions.
The proposed deal with Saudi Arabia makes sense in this context. Other commenters have noted the Saudis could only spend their renminbis on Chinese goods and services. That’s true in the short term but if China succeeds in making their currency a viable alternative to the dollar in a substantial number of countries then the Saudis will have other venues to spend that money. And of course the Saudis will still sell oil to the West for dollars.
The most interesting statement in this article, for me, was:
Following the events of the past two weeks, this latest news seems to be part of emerging pattern. It is likely that the Chinese and the Russians have put together a concerted plan to carve out a sphere of global influence that challenges Western hegemony. The invasion of Ukraine may have just been a trigger to set the plan in motion.
I saw that idea floated elsewhere but it struck me as borderline conspiracy theory. The current author, though, seems realistic and level-headed. I wonder where he got his information on this possibility? How likely is it that the Ukraine invasion is only the opening gambit in a Sino-Russian challenge to the West?

Jim R
Jim R
4 months ago

It can hardly be a secret that Russia, China and much of the Middle East (the list goes on) would love to see the West stumble and maybe even take a fall and have been waiting for the opportunity to help make that happen. How will it happen exactly? ‘Slowly at first, then all at once’.

Last edited 4 months ago by Jim R
R Baron
R Baron
4 months ago
Reply to  Jim R

If the West were to fold up, whom would the Chinese flog the stuff they make to?

Jeff Carr
Jeff Carr
4 months ago

The war in Yemen is a proxy war between Saudi and Iran. The US left do not understand that their denunciation of Saudi in Yemen can be interpreted as support for Iran by interested parties.
The West could regret cosying up to Iran for short term expediency. Iran has differences with Saudi, Emirates and Israel which are longstanding.
Liberal democracy hardly exists in the Middle East and pragmatism may be necessary.

Ian Stewart
Ian Stewart
4 months ago
Reply to  Jeff Carr

Disagree – the US should use Iran as leverage to get Saudi and Israel to behave on supporting Western policy – that’s the pragmatic approach.
Just like the U.K. used to do to maintain the balance of power in Europe.

Graham Stull
Graham Stull
4 months ago

I can’t disagree with the realpolitik with which you analyze these events.
Yet I will die a classical liberal. And in my mind, the values we are defending are worth more than just the fuzzy warm feeling of being on the moral high ground.
Our values underpin a system that is fundamentally better. By defending fundamental rights, we create a strong, bottom-up society. By contrast, the problem with top-down-ism is it becomes top-heavy. Bad decisions are inevitably made by central planners, dictators – however benevolent they begin – turn to absolute corruption, especially when placed under pressure.
This is a dark time for classical liberalism. We are Minas Tirith and the armies of Mordor are at our gates. But we cannot give in to their way of thinking. Killing journalists is wrong. Waging war is wrong. Censorship is wrong. And when the dust settles on Xi, Putin and the corrupt and evil Sauds, the only real question is how much we will have lost of our own values.

Peter LR
Peter LR
4 months ago

“Given that the UK will be trying to wean itself off from Russian oil and gas over the coming years, making a deal with the Saudis will be even more important”: or use our own now that the price makes it viable. Why do we have to sell them to ourselves at world market prices?

Ian Stewart
Ian Stewart
4 months ago

The Saudis are getting too big for their geopolitical boots. The Middle East is becoming more irrelevant as renewables kick in. The Americans will agree a nuclear deal with Iran, on the basis that Iran stays in the region, remove sanctions and leave the Saudis to deal with that problem themselves. Israel is making the same mistake – the attachment to protect Israel is lessening all the time as US demographics change.