The Russia-Ukraine conflict has altered the global market in numerous ways, including affecting oil prices and hastening the collapse of the US dollar. Not only has the US currency deteriorated, but other dollar-dependent currencies, such as the petrodollar, have also suffered.
Petro-Dollars, a concept coined in the mid-1970s, are crude oil export receipts denominated in US dollars. Because the global economy and its demand for secure assets surpassed the available supply of bullion, the Bretton Woods system of fixed currency exchange rates tied to gold through the US dollar failed in 1971.
Only the dollar has the potential to fill that hole. As the worldwide supply of dollars increased in response to the United States’ debt and budget deficits, so did the amount of petrol dollars collected by oil exporters who benefited from dramatically higher crude oil prices.
The US Dollar’s global appeal is unaffected by oil exporters’ goodwill. It is based on statistics from the United States, which is the world’s largest economy and goods importer, with liquid capital markets, the rule of law, and military might.
Petro dollars are simply US Dollars accepted as payment for oil purchases and are not a separate currency.
Would the world’s economy collapse if the US lost its petrodollar hegemony? Not at all. Analysts feel that any market, whether it is a stock exchange, a wheat exchange, or an oil exchange, requires a unit of measurement. The dollar was the logical pick for most markets due to the importance of the US economy.
However, choosing the Euro, the yen, or even bushels of wheat as the unit of account for the oil market would make no difference. It’s only a matter of accounting.
Consider the case where oil prices are expressed in yen or bushels of wheat. The price of a barrel of oil would be 20 bushels if it were priced in wheat. Oil would have no direct impact on the dollar if it were priced in either the yen or wheat.
If oil sellers still regarded the dollar as their preferred asset, they would want dollar equivalents of the yen or wheat price of oil. On modern computers, the calculation would take a billionth of a second, and business would continue as usual.
Saudi Arabia has reportedly accelerated discussions with China to price part of its oil sales in Yuan. It’s been speculated that the Saudis are dissatisfied with recent US policy measures that have stifled the country’s metal sales.
Of course, the question remains whether such a move would be detrimental to the US economy. If such an agreement is reached, it will imply that 25% of Saudi oil will be exchanged in Yuan, which is a significant amount of money.
This could suggest that, in around 20 years, the Petro dollar will be less important to the strength of any economy. Electric vehicles are expected to account for over 70% of worldwide passenger vehicle sales by 2040, whereas fuel for internal combustion vehicles is expected to peak in 2027, stabilise for about ten years, and then plunge dramatically.
The future of oil production is dismal, making the loss of petrodollar supremacy all the more likely. Another reason is the Russia-Ukraine war.
Due to tough sanctions imposed on Russia by the US, Russian exports are unable to be paid in US dollars; as a result, the Kremlin is looking for alternatives, such as exchanging oil with India in rubles or rupees.
For the first time, the Saudis are discussing selling oil to China in exchange for Chinese yuan. This is analogous to the rupee-ruble swap between India and Russia.
If this Saudi oil-for-Yuan deal with China succeeds, other countries may request similar treatment. This will tremble the foundations of the dollar’s dominion.
We don’t have a global currency yet, and there isn’t a credible alternative to the US dollar either.
If every country attempted to conduct business in its own currency, the globe would become a more difficult place.
The US dollar’s standing as “king of the trade and invoicing world” appears to be under threat, based on current developments.
