Potential Saudi Use of Yuan Shifts Country’s Position as Oil Prices Rise

Aramco facilities like this one are part of the Saudi state’s extensive capacities, allowing it to potentially increase production volumes. (Previewtech)

The Wall Street Journal reported that Saudi Arabia had been in talks with China to sell its oil in Chinese yuan instead of US dollars on March 15. Such negotiations will likely add to the existing tensions between the US and the Gulf states following the Russian invasion of Ukraine. The war has created new disputes about oil production between the United States and Saudi Arabia. 

However, this shift in relations between Saudi Arabia and China is likely not directly motivated by these most recent international developments. Rather, negotiations between the two states over the currency switch have been in the making since 2016. Their progress has only accelerated in recent months due to President Biden’s more scrupulous stances toward the Saudi state, especially regarding its war in Yemen and movement towards a new Iran nuclear deal. 

Even if they might not be successful, these negotiations are still a noticeable sign of Saudi discontent. During the last three weeks, the governments of the U.S. and of other European countries under pressure from rising oil prices have called on Saudi Arabia to increase its oil output to counteract this development. So far, the governments of Saudi Arabia and the United Arab Emirates – the only countries capable of increasing output – have refused to do so, keeping to the production goals of OPEC+, the cartel of oil-producing countries that includes Russia. 

Part of why the negotiations between the Saudi and Chinese governments are so significant is that a switch to yuan would threaten the dominance of the dollar in international oil sales. Saudi Arabia has traded its oil in “petrodollars” since it signed a bilateral agreement with the U.S. in 1974: a practice that made the dollar’s use nearly universal in oil sales and helped to transform it into the world’s preferred reserve currency. While analysts question the importance or even feasibility of a shift to yuan if it were to come to fruition, the step does point to a Saudi desire for a more hedged position. 

This is certainly not a new policy goal for Saudi Arabia, which for a long time has sought to exercise autonomy through its dominant role within OPEC. The oil cartel’s alliance with Russia under OPEC+, which has markedly increased its international relevance, might be the most notable reason why the Saudi government does not believe itself to be in a position to alienate Russia by raising its levels of output. 

Both Saudi Arabia and the United Arab Emirates have also generally benefited from the crisis in Ukraine in the form of increased bargaining leverage with the West. There is therefore little reason to believe that either country will conform to U.S. and European demands to open up spare capacities any time soon. Even though Saudi Arabia may not accept yuan for its oil after all, the current situation points to a weakened reliance on the West and a growing desire for a more independent economic and security policy.