Saudi Arabia Considers Accepting Yuan Instead Of Dollars To Sell Chinese Oil

Saudi Arabia is actively negotiating with Beijing to sell some of its oil to China in yuan, people familiar with the matter said. exporter to Asia.

Negotiations with China over oil contracts priced in yuan have been intermittent for six years, but have accelerated this year as the Saudis grow frustrated with years of U.S. security commitments to protect the kingdom, people say.

The Saudis are outraged that the US does not support their intervention in the civil war in Yemen, as well as the Biden administration’s attempt to strike a deal with Iran over its nuclear program. Saudi officials said they were shocked by the hasty withdrawal of US troops from Afghanistan last year.

China buys more than 25% of the oil exported by Saudi Arabia. If the price were quoted in yuan, these sales would strengthen the position of the Chinese currency. Saudi Arabia is also considering including yuan-denominated futures contracts, known as petroyuan, in the pricing model of Saudi Arabian Oil Co., known as Aramco.

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It would be a major shift for Saudi Arabia to value even some of its roughly 6.2 million barrels of crude oil exports per day in non-dollar terms. Most of the world’s oil sales – about 80% – are in dollars, and the Saudis have traded oil exclusively in dollars since 1974 as part of a deal with the Nixon administration that included guarantees for the kingdom’s security.

China introduced yuan-priced oil contracts in 2018 as part of its efforts to make its currency traded globally, but it hasn’t affected the dollar’s dominance in the oil market. For China, the use of dollars has become a threat, as evidenced by US sanctions against Iran over its nuclear program and against Russia in response to its invasion of Ukraine.

China has stepped up its courtship of the Saudi kingdom. In recent years, China has helped Saudi Arabia build its own ballistic missiles, advised on its nuclear program and has begun investing in Crown Prince Mohammed bin Salman’s favorite projects like Neom, a futuristic new city. Saudi Arabia has invited Chinese President Xi Jinping to visit the country later this year.

In January, Saudi Foreign Minister Faisal bin Farhan met Chinese Foreign Minister Wang Yi in China.

Photo: Anonymous/Associated Press

Meanwhile, Saudi relations with the US have deteriorated under President Biden, who said during the 2020 presidential campaign that the kingdom should be “pariah” for the 2018 assassination of Saudi journalist Jamal Khashoggi. Khashoggi’s murder refused to attend a phone call between Mr Biden and Saudi Arabia’s ruler, King Salman, last month.

This is also due to the deterioration of US economic relations with Saudi Arabia. The US is currently one of the largest oil producers in the world. It once imported 2 million barrels of Saudi oil per day in the early 1990s, according to the U.S. Energy Information Administration, but that figure dropped to less than 500,000 barrels per day in December 2021.

By contrast, China’s oil imports have increased over the past three decades in line with the growth of its economy. Saudi Arabia was the largest supplier of crude oil to China in 2021, selling 1.76 million barrels per day, followed by Russia with 1.6 million barrels per day, according to China’s General Administration of Customs.

“The dynamics have changed dramatically. The US relationship with Saudi Arabia has changed, China is the world’s largest oil importer, and they offer the kingdom many lucrative incentives,” said a Saudi official familiar with the talks.

“China offered the kingdom everything you could imagine,” the official said.

More on U.S.-Saudi Arabia-China Relations

A senior US official called the idea of the Saudis selling oil to China in yuan “highly volatile and aggressive” and “unlikely.” The official said the Saudis had floated the idea in the past when there was tension between Washington and Riyadh.

Perhaps the Saudis will retreat. The daily conversion of millions of barrels of oil from dollars to yuan could shake the economy of Saudi Arabia, whose currency, the rial, is pegged to the dollar. Prince Mohammed’s aides warned him of unpredictable economic damage if he hurriedly implemented the plan.

An increase in yuan sales would tie Saudi Arabia more closely to the Chinese currency, which has not caught on with international investors due to Beijing’s tight controls. Reduced sales of oil in a less stable currency could also undermine the Saudi government’s financial outlook.

Some officials have warned Prince Mohammed that accepting payments for oil in yuan could pose risks to Saudi Arabia’s earnings associated with US Treasury bonds abroad and the limited availability of the yuan outside of China.

The impact on the Saudi economy is likely to depend on the volume of oil sales and the price of oil. Some economists say not selling oil in dollars would diversify the kingdom’s revenue base and could eventually see the rial be moved to a basket of currencies similar to the Kuwaiti dinar.

“If it were (done) now, at a time of high oil prices, it would not be perceived negatively. It would rather be seen as deepening ties with China,” said Monica Malik, chief economist at Abu Dhabi Commercial Bank.

The Saudis still plan to do most of their oil transactions in dollars, people familiar with the talks say. But the move could encourage other manufacturers to price their Chinese exports in yuan as well. China’s other major sources of oil are Russia, Angola and Iraq.

Saudi actions could undermine the dominance of the US dollar in the international financial system, which Washington has relied on for decades to print Treasury bills that it uses to finance its budget deficit.

“The oil market, and by extension the entire global commodity market, is an insurance policy for the dollar’s status as a reserve currency,” said economist Gal Luft, co-director of the Washington-based Institute for Global Security Analysis, who co-authored a book on de-dollarization. “If this block is taken out of the wall, the wall will begin to collapse.”

Talks with China on yuan oil pricing began before Prince Mohammed, the kingdom’s de facto leader, made his first official visit to China in 2016, people familiar with the matter said. According to People, the crown prince asked then-kingdom energy minister Khalid al-Falih to look into the proposal.

Mr. Falih instructed Aramco to prepare a memorandum focusing on the economics of the transition to RMB pricing.

“He really didn’t think it was a good idea, but he couldn’t stop talking because the ship had already sailed,” said another person familiar with the meetings.

Pro-switch officials in Saudi Arabia argue that the kingdom could use some of the yuan earnings to pay Chinese contractors involved in mega-projects at home, which would help mitigate some of the risks associated with capital controls on the currency. China could also offer incentives such as multibillion-dollar investments in the kingdom.

Another official familiar with the talks said the yuan pricing could give the Saudis more influence over the Chinese and help persuade Beijing to scale back support for Iran.

Ali Shihabi, who sits on the board of Neom and previously ran a pro-Saudi think tank in Washington, said the kingdom cannot ignore China’s desire to pay for oil imports in its own currency, especially after the US and EU blocked the Russian central bank from selling foreign exchange in their reserves.

“Any country doubts about the need to diversify in RMB and other currencies/geography would end up with this huge step,” Mr. Shihabi tweeted in response to this article.

— David S. Cloud contributed to this article.

Write to Summer Said at [email protected] and Stephen Kalin at [email protected]