Opinion A ‘Petroyuan’ Could Further Shake the Dollar’s Dominance

In the latest sign the dollar-centric global financial system is under immense strain, China and Saudi Arabia have “accelerated” ongoing talks to price oil contracts in yuan instead of greenbacks, according to a Wall Street Journal report.

The dollar’s ongoing steady decline as a global trading and reserve instrument has significant implications for the U.S. economy, and could make neutral or non-state monetary networks more useful to a wider range of actors.

Crucially, the “petroyuan” talks were not triggered by events in Ukraine, but have been ongoing for six years. They have been accelerated not by Russia’s invasion, according to the Journal, but by U.S. Middle East policy in recent months. That includes the military withdrawal from Afghanistan and a White House more assertively critical of the allegedly Saudi-planned murder of journalist Jamal Khashoggi.

U.S. support for the regional political agendas of OPEC nations was key to the arrangement that standardized the dollar pricing of oil in the 1970s, so hints of a pullback shouldn’t be surprising. The U.S. is also consuming only one-quarter as much Middle Eastern oil as it was when the petrodollar system was established, while Chinese imports have grown. In many respects, that’s for the good – Saudi Arabia is a brutally repressive monarchy, hardly less politically toxic than Vladimir Putin’s Russia, and the U.S. willingness to step back from a dangerously cozy relationship there is good for the world.

But the ongoing shift creates a fundamental structural problem. The dollar-denomination of OPEC oil sales plays a huge role in unifying global markets around a common currency. If the U.S. itself has looser ties to OPEC, both this powerful dollar-trade node and the broader dollar network will almost inevitably begin to splinter and unravel.

The news follows unprecedented sanctions against Russia, including the freezing of central bank reserves, and the seizure of U.S.-held central bank funds from Taliban-controlled Afghanistan.

Read more: America’s Quiet Default

These measures are a clear warning to other dissenters or rivals to the U.S.-Europe power nexus that they can’t rely on the good faith of Western banking authorities. That doesn’t necessarily mean the yuan is suddenly a superior instrument – it has serious problems of its own. But the dramatic erosion of the dollar’s immutability certainly makes any dollar alternative that much more appealing.

There have been rapid assurances that the Saudi threat is merely a strategic feint against the U.S., or that a small petroyuan trade would not be a threat to dollar dominance.

This is true in the sense that the first thousand gallons of water taken on by the Titanic didn’t sink it. What matters isn’t the water but the holes letting it through the hull of the U.S.S. Dollar. Until those weaknesses and pressures change, every pinprick makes the dollar’s fate less certain.