Saudi Arabia considers accepting yuan instead of dollars in Chinese oil sales

The Saudis are angry that the United States does not support their intervention in Yemeni Civil Warand on the Biden administration Trying to make a deal with Iran over its nuclear programme. Saudi officials said they were shocked by the haste US withdrawal from Afghanistan last year.

China buys more than 25% of the oil that Saudi Arabia exports. If priced in yuan, these sales will boost the Chinese currency’s prestige. The Saudis are also considering including yuan-denominated futures contracts, known as Petroyuan, in a pricing model

Saudi Arabian Oil Company.

known as Aramco.

It would be a profound shift for Saudi Arabia in pricing even some of its crude oil exports of about 6.2 million barrels per day with anything other than dollars. the majority global oil sales– About 80% – is done in dollars, and the Saudis have been trading oil in dollars only since 1974, in a deal with the Nixon administration that included security guarantees for the kingdom.

China Oil contracts priced in yuan were introduced in 2018 As part of its efforts to make its currency tradable around the world, it did not affect the dollar’s dominance in the oil market. For China, the use of the dollar has become a risk highlighted by US sanctions on Iran over its nuclear program and on Russia in response Invasion of Ukraine.

China stepped up courtship with Saudi Arabia. In recent years, China has helped Saudi Arabia Build their ballistic missilesconsulted about a nuclear program and Investing started In the projects of Crown Prince Mohammed bin Salman, like NeomFuturistic new city. Saudi Arabia invited Chinese President Xi Jinping

To visit later this year.

Meanwhile, Saudi Arabia’s relationship with the United States has deteriorated under President Biden, who said in the 2020 campaign that The kingdom should be ‘forsaken’For the murder of Saudi journalist Jamal Khashoggi in 2018. Prince Mohammed, who US intelligence authorities say ordered the murder of Mr. Khashoggi, refused to sit down on a call between Mr. Biden and Saudi King Salman, last month.

It also comes at a time when the US economic relationship with the Saudis is eroding. The United States is now among the world’s largest oil producers. It once imported 2 million barrels of Saudi crude per day in the early 1990s, but those numbers fell to less than 500,000 barrels per day in December 2021, according to the US Energy Information Administration.

By contrast, China’s oil imports have ballooned over the past three decades, in line with its expanding economy. Saudi Arabia was China’s largest supplier of crude in 2021, selling 1.76 million barrels per day, followed by Russia with 1.6 million barrels per day, according to data from China’s General Administration of Customs.

The dynamics have changed dramatically. “The US relationship with the Saudis has changed, China is the world’s largest importer of crude, and they are providing many lucrative incentives to the kingdom,” said a Saudi official familiar with the talks.

“China has been providing everything they could imagine for the kingdom,” the official said.

A senior US official described the idea of ​​the Saudis selling oil to China in yuan as “highly volatile and aggressive” and “highly unlikely”. The official said the Saudis had brought up the idea in the past when there was tension between Washington and Riyadh.

It is possible that the Saudis will back off. Converting millions of barrels of oil from dollars to yuan each day could upset the Saudi economy, whose currency, the riyal, is pegged to the dollar. Prince Mohammed’s aides have warned of unpredictable economic damage if he goes ahead with the plan in a hurry.

Doing more sales in yuan would link Saudi Arabia more closely to the Chinese currency, which has not attracted international investors due to Beijing’s tight restrictions on it. Contracting to sell oil in a less stable currency could also undermine the Saudi government’s fiscal outlook.

Some officials have warned Prince Mohammed that accepting oil payments in yuan would pose risks to Saudi revenue tied to US Treasury bonds abroad and the limited availability of yuan outside of China.

The impact on the Saudi economy will likely depend on the amount of oil sales involved and the price of oil. Some economists said moving away from dollar-denominated oil sales would diversify the kingdom’s revenue base and could eventually convert the riyal into a currency basket similar to the Kuwaiti dinar.

If it were (done) now at a time of strong oil prices, it would not be viewed negatively. Monica Malik, chief economist at Abu Dhabi Commercial Bank, said the matter would be seen as deepening ties with China.

People familiar with their conversations say the Saudis still plan to conduct most oil transactions in dollars. But the move could tempt other producers to price their Chinese exports in yuan as well. Other major oil sources for China are Russia, Angola, and Iraq.

The Saudi move could reduce the dominance of the US dollar in the international financial system, which Washington has relied on for decades to print the treasury bills it uses to finance its budget deficit.

“The oil market, and by extension the entire global commodity market, is the insurance policy for putting the dollar as a reserve currency,” said economist Gal Luft, co-director of the Washington-based Institute for Global Security Analysis. Co-author of a book on dedollarization. “If that block is taken out of the wall, the wall will start to collapse.”

Informed people said that talks with China over pricing oil in yuan began before Prince Mohammed, the kingdom’s de facto leader, made his first official visit to China in 2016. The two sources said the crown prince had asked the kingdom’s energy minister at the time, Khalid al-Falih, to study the proposal.

Al-Falih instructed Aramco to prepare a memorandum focusing heavily on the economic challenges of switching to yuan pricing.

Another person familiar with the meetings said, “He didn’t really think this was a good idea, but he couldn’t stop the conversations because the ship had already sailed.”

Saudi officials in favor of the shift have argued that the kingdom could use a portion of the yuan’s proceeds to pay the salaries of Chinese contractors involved in mega projects locally, which would help mitigate some of the risks associated with currency capital controls. China can also offer incentives such as billions of dollars in investments in the kingdom.

Another official familiar with the talks said that pricing the yuan could give the Saudis more leverage with China and help persuade Beijing to reduce support for Iran.

Ali Al-Shihabi, a member of the board of directors of NEOM who previously ran a pro-Saudi think tank in Washington, said that the kingdom cannot ignore China’s desire to pay for oil imports in its own currency, especially after the United States and the European Union banned Russia. The central bank sells foreign currency in its stock reserves.

Mr. Shihabi tweeted in response to this article: “Any doubts that countries had about the need to diversify into yuan and other currencies/geographical regions would have ended with this huge step.”

— David S. Cloud contributed to this article.

write to Happy Summer at [email protected] and Stephen Kalin at [email protected]