Over the past few weeks, the BRICS alliance has discussed the ongoing important role of the petrodollar and ways to challenge US influence over the global economy. Although these discussions have been ongoing for the past year, the economic alliance now appears more ready than ever to challenge Western currency, especially in the area of ​​oil trade.
The alliance has paid significant attention to local currencies over the past year. This effort has been important for countries like China, whose currency the yuan has strengthened its position globally. Even though the yuan has not yet completely overtaken the US dollar, the dollar's decline has already begun. According to the Atlantic Council's Dollar Dominance Meter, the share of global US dollar reserves has fallen by more than 14%. This figure could increase further if the BRICS alliance focuses on alternative trading currencies in the oil sector. In simple words, if BRICS countries start using their local currency instead of dollar for oil trade, then America's condition may worsen.
Recently Saudi Arabia said that they are “ready to negotiate new possibilities.” Saudi said this in the context of oil trade. This could be a cause of serious concern for the West. Especially for America, because the global obsolescence of the petrodollar could lead to a huge economic crisis. Let us know why America may be in danger due to withdrawal from petrodollar.
What is a petrodollar?
The relationship between the US dollar and crude oil was established in the 1970s. At this time an agreement was reached between America and Saudi Arabia, under which Saudi Arabia and OPEC countries agreed to trade oil only in US dollars. The result was that countries purchasing oil needed US dollars, making the US dollar the dominant currency in global trade. This system is called “petrodollar”. This strengthened the American economy, because the whole world needed dollars for oil, which maintained the demand for the American currency.
Why could America be in trouble due to the end of the petrodollar?
Decline in global demand for US dollar
The petrodollar system has kept the US dollar the dominant currency of global trade for decades. If oil trading begins in other currencies, demand for the US dollar could fall sharply. When demand for the dollar declines, the US economy could suffer massive losses, threatening US financial stability. This situation will cause a decline in the value of the dollar and could increase the US trade deficit.
Impact on US debt financing
Due to reduced demand for US dollars, it will become expensive for America to borrow from international financial markets. Currently, the US relies on foreign investment to finance its massive debt. The move away from the petrodollar may lead to foreign investors preferring other currencies instead of the dollar, which would increase borrowing costs for the US government. This will have a direct impact on the US budget and future economic plans.
change in global economic balance
If the Yuan, Rupee, or any other currency were to be used by the BRICS countries for oil trade, it would be a major change in the global economic balance. This is sure to weaken American economic supremacy. China, Russia, India and other emerging countries may gain a place in the global economic center, which will weaken America's international economic and political power.
Geopolitical influence and balance of power
The end of the petrodollar will not just be limited to the economic crisis, but will also have deep geopolitical implications. The US has maintained its dominance in global politics and diplomacy for decades by using the power of its dollar. If the petrodollar ends, America's geopolitical influence could weaken, which could weaken its standing among its allies and international organizations. As a result, the global balance of power may shift, with China, Russia, India and other emerging nations strengthening their positions.
Could the petroyuan replace the petrodollar?
The petrodollar has been the dominant vehicle for global oil trade for decades, giving the US dollar global dominance. But in recent years, the rise of China's yuan (CNY) and attempts to popularize the currencies of alliances such as BRICS have sparked a new debate: could the petroyuan replace the petrodollar?
China has intensified efforts to strengthen the position of its currency yuan in the global market, especially in oil trade. At the same time, several major oil-producing countries, notably Saudi Arabia, are now looking to new possibilities beyond the dollar. In such a situation, the question has become important whether the yuan is ready to replace the US dollar.
Petroyuan prospects
China's growing global influence
China is the world's largest oil importer and its economic and political influence continues to grow. China has signed several bilateral agreements with its international trading partners to promote transactions in yuan. Additionally, China has gained significant economic foothold in many countries through the Belt and Road Initiative (BRI) and other international investment plans, allowing the yuan to emerge as a major currency in global trade.
Role of Saudi Arabia and oil exporting countries
The role of Saudi Arabia and other OPEC countries could prove important in the rise of Petroyuan. Saudi Arabia, a major oil exporter, has recently indicated that it is ready to adopt currencies other than the US dollar in oil trading. If Saudi Arabia and other oil producing countries start trading oil with China in yuan, it could be a big step forward for the petroyuan.
Rising global inflation and weakness of the US dollar
Questions are being raised about the long-term stability of the US dollar, especially due to rising inflation and economic instability following the COVID-19 pandemic. If the yuan gets priority in oil trade, it could prove to be a major blow to the US dollar.
Global trend of de-dollarization
Many countries are now moving towards de-dollarization (reducing dependence on the dollar), particularly countries such as Russia, China, and Iran, which have attempted to move away from the dollar in recent years to cope with US sanctions. . If the yuan gets a boost in global energy markets, this process could accelerate and the rise of the petroyuan could be possible.
Challenges facing Petroyuan
lack of convertibility of yuan
The biggest weakness of the yuan is that it is not a fully convertible currency. Convertibility is a process by which the currency of one country can be converted into another currency without any restrictions or controls. When a country's currency is convertible, it can be freely bought or sold in the foreign exchange market. Its main objective is to ensure that there is ease of international trade, investment and financial transactions. The Chinese government controls the exchange rate of the yuan and it cannot trade freely in international financial markets like the dollar. Unless the yuan becomes fully convertible, it will be difficult to replace the petrodollar.
Strength and stability of the US dollar
The US dollar has been the most trusted currency for global trade and investment. Its widespread use, the strength of dollar-based international financial institutions, and the economic stability of the US make it a safe currency. The yuan still has to prove this trust and stability against the dollar.
China's political and economic challenges
China also faces internal political and economic challenges, such as rising debt and slow economic growth, which could hinder global acceptance of the yuan. Additionally, China's geopolitical tensions with Western countries may also make it difficult for the yuan to be widely adopted in the global financial system.
Although China's economic strength and the increasing influence of the yuan could make the petroyuan emerge as an alternative to the petrodollar, it faces several challenges. In the future, if China resolves these challenges and the use of the yuan in global oil trade increases, the petroyuan could challenge the dominance of the US dollar. But for now, the petrodollar still remains the major player in global oil trade.
Efforts by BRICS countries to move away from the petrodollar and promote other currencies could cause serious economic and political crisis for the US. The times ahead may be difficult for America, as the BRICS alliance and other countries are rapidly working on ways to distance themselves from the petrodollar. In such a situation, there can be a big impact on the American economy and its global situation.
