Monday, June 10, 2024, was the first international business day since the 1974 military and economic support agreement between the Nixon administration and Prince Fahd Ibn Abdulaziz Al Saud expired. Since then, Saudi Arabia has been free to sign oil trade agreements that pay in any currency previously restricted to the US dollar. The actual impact of the termination of this agreement will only become clear over time, but it is difficult to imagine a future in which the US dollar’s status as the leading reserve currency in the G77 of the United Nations is not threatened. In 1999, the US dollar accounted for 71% of global reserves; by 2022, it had fallen to 58%.
Could Nixon and Kissinger have predicted the current economic situation? Perhaps some did. Russia and the US are again at war, but not directly at war. The opinions of Middle Eastern countries still matter, but the term “buffer state” is much less relevant in an era when organized (or not organized) people with access to the Internet can broadcast propaganda directly to their computers, smartphones, and smartwatches. The list goes on. Kissinger, who died in November, believed until his death that relations between Russia and the US were more strained than they had been under Brezhnev. Crucially, however, neither of them could have predicted that the petrodollar would collapse and be replaced by the petroyuan. This is partly because China has gained an unfathomably powerful economic position, with Hong Kong now (and increasingly) under Chinese control. This would have been unthinkable without the British sincerity in honoring the 1898 treaty (the modern state of China came into existence 51 years after it was signed).
There are many regional and local reasons for this decline among the G77 countries. One of the key lessons of the 2008 financial crisis was that globalization often actually created more regional and local economies in terms of capital accumulation and distribution. However, the overwhelming majority of these economies were fueled by the rapid growth of the Chinese economy. Saudi Arabia’s King Mohammed bin Suleiman’s decision to oppose the renewal of the 1974 agreement only accelerated this growing dependence. Few countries have access to resources that can provide oil currency. Renminbi (RMB) foreign exchange reserves will increase by exploiting the vacuum created within a system dominated by a single transaction currency. This shift can only bring good news to Chinese soft power strategists in the Politburo and/or heads of private enterprises. This assessment may seem ambiguous, but it is. There is little reliable public information about the true distinction between state and private enterprise in China during the 12 years it took Xi Jinping to consolidate his authoritarian reforms. However, we do have enough information to make some broad predictions.
There is a wide variation in the sympathy shown by the G77 towards the US government, which means that the existing role is likely to be strengthened. Let’s look at Asia first. It is worth noting that Singapore has maintained a certain level of economic loyalty to the US since the early 1960s when the US was at the peak of its foreign aid spending, until the signing of the 1974 agreement. Singapore has a huge USD reserves relative to its physical size and population. In fact, while China has tried to attract Singapore’s large ethnic Chinese population through various forms of media influence, Singapore’s leaders still cringe when Singapore is described as a “Chinese nation”, insisting that Singapore’s values and worldview are unique despite its largely ethnic Chinese population. Despite advances in “green” energy production, consumption of petroleum products is still growing, and the petroyuan will likely cause divisions within an increasingly politically savvy population.
Other countries, like Vietnam, have seen significant improvements in their relations with the United States since 1974, but will never see the same visceral partnership that the United States has with Singapore. Also, the Philippines, located in the South China Sea, is strategically important for shipping oil to and from Chinese ports. The Philippines’ relationship with the United States is perhaps the most complicated of any Asian country, having been annexed as an unincorporated territory during the struggle against Spanish rule in the late 19th century.Day And in my early 20sDay For centuries, the United States has been well-regarded in the Philippines, with approval ratings hovering around 90 percent. But Rodrigo Duterte’s term (2016-2022) has shown that the country’s loyalty can be easily tested, and during his premiership he increased trade with Chinese brands linked to oil production. By 2018, Volkswagen Philippines had replaced its model range with models produced in China for the domestic market. While the US position was relatively stable under Marcos, the reorientation toward China will do more to undermine America’s soft power advantage in Southeast Asia than it did in the previous decade.
The mix of ASEAN’s reactions to the end of the greenback bill for oil purchases will have a major impact on the development of the Brazilian economy. The South American industrial giant’s interest in trade with Southeast Asia is well demonstrated by the resources the government has invested in improving relations with countries such as Indonesia in recent years. There are also compelling reasons for being caught between the two superpowers and not committing to either. Nevertheless, Saudi Arabia exported about $4.8 billion worth of crude oil to Brazil last year.
And what about Iran? Another geographically vast country with mixed feelings about being a beneficiary of Anglo-American soft power. Iran’s direct contribution to China’s wealth is minimal due to the breakdown of the petrodollar agreement. Iran produces its own oil, its relations with Saudi Arabia are strained, and there are ethnic and religious contexts that transcend the economics of oil trade. In short, Iran will not be a trading partner. However, there will be an imminent change in China’s export car market, where Iran is currently a significant consumer. Oil for cheap cars: It is reasonable and predictable that China will buy oil from Iran in renminbi. Proportionally, the most extensive change will occur in sub-Saharan Africa, slightly further south than Iran. Over the past two decades, China has stepped up its stadium diplomacy efforts in Africa. Still, Chinese developers are making inroads into infrastructure. The more construction projects that get underway in Africa, the more Chinese fuel is consumed, the more Chinese vehicles are on the road, and the more renminbi is being generated. In short, the Petroyuan will effectively act as a discount card for infrastructure development in the region.
Finally, there is Oceania. America’s loyalty to Australia and New Zealand seems to have been determined by historic agreements such as the 1951 Australia, New Zealand, and United States Security Treaty (ANZUS) and more recently the 2021 Australia, United Kingdom, and United States Treaty (AUKUS). Nevertheless, money talks. In Australia, road trains still transport income and livelihoods for many remote communities. The country produces ample oil, but annual crude oil production has steadily declined from 16,570 megalitres to 5,210 megalitres between 2012 and 2024. Petroyuan’s rise, in terms of China’s soft power on the continent, has not been premature. Both Australia and New Zealand have experienced significant Chinese interference in the right to freedom of expression in the media and academia. Protests and government pledges tend to go nowhere, and the Chinese government has invested $2 billion in Australia in 2022 and 2023.
The end of the Petrodollar Accord and the rise of Petroyuan will have ripple effects on the inputs and outputs of the global economy. Xi Jinping and the Chinese Communist Party have been waiting for the decline of this policy. It would be foolish to ignore the impact that the Petrodollar Accord has had on domestic economies around the world over the past half-century. As the crucial election approaches, the United States would do well to work with the new Labour government in the UK to discuss economic opportunities in a bipartisan manner. With the hostilities of the Israel-Hamas war and the Russian invasion of Ukraine, protecting oil interests has never been more important.
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