Since the deal between Saudi Arabia and the United States in the early 70s, making the US dollar the currency of global oil trade, the US dollar has remained the world’s dominant currency, carrying major implications.

This meant that every country needed US dollars to import oil. The arrangement ensured the dominance of US dollars in the global financial system. It also meant, unlike others, the US was not required to send goods and services to other countries to earn dollars.

For the US to ensure its standard of living, its superpower status and sustain its military hegemony, it only needed to print dollars. Thus, maintaining the dollar’s dominance has been Washington’s major strategic objective. It cannot afford to let it slip.

When Saddam and Gaddafi were removed from power, there were speculations in the media that one of the reasons behind their removal was the challenge they had begun posing to the use of the dollar as the currency of their oil trade. If anything put the final nail in Saddam Hussein’s coffin, it was his move to start selling oil for euros, said Richard Benson in his piece, “Oil, the Dollar, and US Prosperity”.

John Chapman writing for The Guardian, underlined on 28 July 2004: “There were only two credible reasons for invading Iraq: control over oil and preservation of the dollar as the world’s reserve currency.” People like Ellen Brown and Alex Newman continue to assert Muammar Gaddafi was removed for insisting on trading Libyan oil in gold dinars instead of US dollars.

The dollar’s dominance in the oil trade is again under threat.

While addressing the Gulf Cooperation Council leaders during his visit last month to Saudi Arabia, President Xi Jinping of China underlined there should be a new paradigm for energy cooperation between China and the Gulf countries. In a bid to promote the yuan’s role as a currency for trading in oil and gas, he urged the Gulf monarchs to ‘make full use of the Shanghai Petrol and Gas Exchange to conduct oil and gas sales using Chinese currency’.

Earlier in March 2022, The Wall Steel Journal (WSJ) reported that Saudi Arabia was in active talks with Beijing to price some of its oil sales to China in yuan. The talks with China over yuan-priced oil contracts have been off and on for six years but have accelerated this year as the Saudis have grown increasingly unhappy with decades-old US security commitments to defend the kingdom, sources told WSJ. In the emerging scenario, Riyadh and its other Gulf Arab allies see Beijing as an emerging military power and a potential ally.

For Riyadh, not paying attention to the Chinese request to use yuan for at least part of their oil trade may not be possible for long. They need to balance the two diametrically opposite demands, from the US to use dollars for its oil trade and from China to use the yuan.

Riyadh and Beijing are also aware of the consequences of any such move. They understand that Washington would not take such a step lightly and that such a move would cause tremors in the global financial order. They need to be careful.

Further, both China and Saudi Arabia are deeply exposed to the US economy. China holds under $1 trillion in US Treasury bonds. Saudi Arabia also has substantial dollar-denominated assets, including $121 billion in US Treasuries and $608bn in the US stock markets.

Both realise they cannot move in that direction too quickly. Any shift towards yuan settlement will (only) be gradual as most Middle Eastern currencies are dollar-pegged, the global market is too large, and the yuan is still not liquid enough, says Professor P.S. Srinivas, a visiting research professor at the East Asian Institute, National University of Singapore.

Realising the impediments, at the end of the visit of President Jinping to Riyadh, there was no mention of any agreement between the two countries on using yuan for their oil trade.

They seem to be moving ahead on the issue slowly, discreetly and carefully. A beginning has been made; the process is long.