A “petrodollar” carries a certain sense of power. Combine oil, a commodity few have but all need, with the dollar, currency of the world’s most powerful country, and you have a monetary force to reckon with. It is no surprise, therefore, that talk of the replacement of these dollars by a Chinese “petroyuan”, as a result of the US-Israel war on Iran, has prompted a sense of unease about fundamental changes in the balance of economic and political power.China’s currency is slowly becoming a bigger part of the global financial system. Yet for now, it lacks a fundamental aspect of what made the petrodollar so important, and remains far from threatening the US currency’s role as a reserve asset. That is because China’s economic model depends on its own relentless accumulation of dollar assets and it is these “sinodollars”, not any kind of petro-currency, that dominate finance today.
The petrodollar, as an idea, is often traced back to a 1974 deal struck by Henry Kissinger with Saudi Arabia in the wake of the first oil shock and the abandonment of the dollar’s link to gold. Kissinger was then secretary of state to US President Richard Nixon. The essence of his deal was that the Saudis would sell their oil for dollars and the US would provide security guarantees in return. Smaller buyers and sellers of oil followed suit.
That basic bargain held for around 50 years. Now it is under question. China wants to buy oil in its own currency, the yuan, and has been building out the infrastructure to do so, such as its own cross-border payment system, Cips. Russia, under heavy sanctions, is agreeable. Iran, too, would rather not sell oil in the currency of its enemy. The US, replete with domestic shale oil, is no longer a net importer and so the currency it wants to pay is no longer an issue. Hence the rise of a “petroyuan”.