Deutsche Bank analyst writes that conflict in the Middle East has the potential to seal the end of the agreement that made the dollar the global currency
The world will still feel the effects of the United States and Israel’s war against Iran in the long term, whether in the energy sector or in the repositioning of actors on the geopolitical board. With missile launches underway, predictions of what the world will be like after the confrontation are still fragile, but an analysis looks at the future of the “petrodollar” and the rise of the “petroyuan”.
The term “petrodollar” refers to the agreement signed in 1974 in which Saudi Arabia – the world’s largest oil exporter – agreed to price its oil in dollars and invest its surpluses in assets also denominated in US currency. The counterpart was US security guarantees. As oil is the main global commodity, the agreement encouraged the dollarization of other value chains and transformed the currency into the most powerful in the world.
The war in the Middle East could be a catalyst for the end of this agreement as it calls into question the North American ability to protect its allies in the region. Energy infrastructures in countries such as Saudi Arabia and Qatar have already been bombarded by Iranian missiles and drones and the US inability to unblock the Strait of Hormuz puts pressure on the entire Middle Eastern economy.
The confrontation also stimulates gears that were already in motion before and which were already showing signs of weakening the dollar. The main one is that most of the oil that leaves Hormuz is no longer destined for the USA, but for Asia. More specifically China, which receives 40% of the oil that crosses the strait.
In this scenario, there is the Chinese desire to reduce its dependence on the dollar and use its own currency in international transactions. Last year, China – a messaging system created by banks around the world in 1973 and uses the dollar and euro – to carry out a transaction in digital yuan with the United Arab Emirates. Saudi Arabia itself is already integrated into this Chinese payment system.
This would be the rise of the “petroyuan”, the popularization of the Chinese currency for operations involving oil and which could undermine the power of the dollar throughout the global value chain. Among China’s main advantages today is being a more important trading partner for the Middle East than the US and having the ability to offer stability, while the White House tries to project its strength in a protracted confrontation in the region that has already caused billions in losses.
“If the Persian Gulf moves closer to Asia in its trade and investment relations and eventually prices less oil in dollars, there could be significant impacts on the use of the dollar in global trade and savings.”says the Deutsche Bank report. Here is it (PDF – 600 kB, in English).
