Saudi Arabia in talks to accept Yuan for oil

Since 1974 when the two countries signed the ‘milestone pact,’ Saudi Arabia has been accepting solely U.S dollars for its oil . The pact, which confirmed the two countries’ commitment to one another, the United States would provide the Kingdom of Saudi Arabia with the promise of security and Saudi Arabia would ramp up its oil production in accordance with the United States requests.
At the time of the deal, the United States imported 2 million barrels of oil a day from the country, however it only imports around 500,000 barrels of oil per day now.
Since then the United States has become one of the top oil producing countries in the world, thus directly decreasing its dependence on Saudi oil. (That is not to say that Saudi oil production doesn’t have an impact on domestic oil prices in the United States.)

However, in recent months the United States has asked Saudi Arabia, along with its OPEC plus partners to increase oil production. Saudi Arabia has made no changes to its oil production targets thus ignoring the United States requests.

The Biden administration’s repeated public criticism on Saudi Arabia and its Crown Prince Mohammad Bin Salam have expedited talks of Saudi Arabia accepting Yuan for oil sales to resurface.

Despite Saudi Arabia not accommodating to the United States plea to increase oil production, “The Biden administration has transferred a significant number of Patriot anti missile interceptors to Saudi Arabia ‘’ in hopes to conjure support from the crown prince to increase oil production and release some pressure caused by Russia invasion of Ukraine.

Saudi Arabia is still refusing to speak with the White House.

And as the United States dependence on Saudi Arabian oil has decreased, and as tensions between the two nations have heightened, China’s reliance on Saudi oil has gradually increased.
Saudi Arabia, which accounts for 25% of China’s oil imports (roughly 1.76 million barrels of oil per day), has been in discussion with President Xi Ping to accept Yuan for some of its oil and oil futures.

China has seen the impact of U.S sanctions on Iran for its nuclear program and Russia for its invasion of Ukraine and the possible impact of having the United States sanction it whilst using the dollar is raising red flags.
Saudi accepting Yuan for some of its oil transactions, is an attempt to diversify away from the dollar, to mitigate future loss in case the U.S pushes sanctions on it. Around 65% of Saudi Arabia’s current reserve is in U.S dollars.
China has also been playing an active role in helping Saudi Arabia build its own ballistic missiles and investing capital in the Crown Prince’s projects. Which further solidifies their long-term alliance.
The International Monetary Fund has slowly been increasing China’s currency in the world exchange reserve since it first introduced the renminbi in 2016. Currently, just under 60% of the reserve currency is the U.S dollar and the Chinese Renminbi at 2.25%.

Though this indicates the increasing security of the currency, China has a tight grip on its money supply. Making it difficult for foreign investors to invest in its companies, among other challenges.
Another thing to keep in mind is the Riyal, Saudi Arabia’s Currency is pegged to the dollar and has been since 1986, and any devaluing of the U.S dollar will directly impact the Riyal.
The U.S dollar remains dominant, and 80% of all oil transactions are done using it, but the current environment could signal what is to come in the next 20 to 30 years with countries around the world pushing to diversify their reserves to protect themselves.

What do you expect to happen over the next few months as tensions continue to rise? Let us know!