Is it a Strategic Shift in Saudi Arabian Economic Vision? Or Simply an Emergent Strategy to Sustain Global Oil Competitiveness?
China and Saudi Arabia just announced the two countries’ will remove the US dollar from oil transactions between the Kingdom and their largest commercial partner; China, effective last week, according to several news reports, in a precursor move to pave “mutually” prosperous economic relations on the medium and long terms, leading to the total dispensing of the USD exchange medium in KSA-China transactions.
Alternatively, the Direct Exchange system, devised recently in Saudi Arabia, which foregoes the SAR-USD Peg in certain commercial transactions, will allow for oil transactions with China to be conducted in Saudi’s local currency, which, according to experts interviewed by the Huffington Post Arabi, would be beneficial for both countries, while on the other hand, weighing heavy on the Dollar, possibly prefacing the breakage of the dollar peg entirely, for Saudi Arabia.
Notably, China happens to be Saudi Arabia’s largest oil partner, at a daily acquisition rate of 1.1 billion barrels, bulking at nearly 15 per cent of the Saudi Arabia’s total annual production of oil.
More so, according also to the Huffington Post Arabi, China was also cited as Saudi Arabia’s largest commercial partner in 2015, with a bulk transaction value of USD49.2 billion, comprising a massive 13 per cent of total global Saudi commercial activity for the same year.
Saudi Economics Columnist, Fadel Boenein, in an interview Turkish Anadolu news agency, says that the new exchange arrangement will boost trades and commercial activity between the two countries, which may actually be true, but more importantly, Boenein highlights that it is highly out of the ordinary for Saudi Arabia to make such a move, while not all unexpected of China, whom have been negotiation with other major trading partners to substitute Dollar-mediated transactions with direct national currency exchange transactions for years.
Was this All China’s Doing?
Purely from a strategic, Chinese perspective, this does not seem out of vogue; china has been working to overthrow the USD exchange peg in commercial transactions globally.
Back in February, Russia and China announced the same thing; all transactions between the two massive economies are done without the exchange mediation of the American dollar.
As a result, in addition to the humongous scale of global activity carried out in Chinese currency, the International Monetary Fund (IMF) has just announced, also early in October, that the Chinese Yuan has been admitted into the global Special Drawing Rights (SDR) exchange basket of currencies, next to the US Dollar, the Euro, the Japanese Yen, and the Sterling Pound, as reported by The Economist and Daily China.
As likely as that may be for China, for Saudi Arabia, the announcement may have come as a surprise; but not just yet, since Saudi’s Riyal, unlike China’s Renminbi (another name for the Yuan, meaning “the people’s money”), is still tied to the dollar in all other global transactions, which suggests this that agreement is in fact, or at least for the most part of it, no more than a mere economic shift to increase Saudi competitiveness in the global oil marketplace, in a simple response to changes in the supply-demand dynamic, with massive outputs surpassing demand, in light of troubling industry indices and bleak outlooks on the near future.
In July, following Russia’s recent acceptance of the Yuan as payments for oil transactions, Gordon Kwan said to Bloomberg, the Hong Kong-based head of regional oil and gas research at Nomura Holdings Inc., that China expects of Saudi Arabia to follow suit, should the KSA want to retain its massive chunk of Chinese oil imports. And that may have been reason enough for Saudi Arabia to take such a radical, possibly positive move in the direction of increasing oil-commodity competitiveness, at a time when the global oil market seems to be viciously unstable.
But is this just a response to changes in the global dynamic? Is it a mere business deal?
Using the “oil card” to pressure and push political agendas is not unlikely for Saudi Arabia. Their history in regards to exploiting their once absolute scale advantage in oil production to weigh in political influence is evidently clear throughout the last six decades.
More recently, Saudi Arabia has been head-butting with Iran on the temporary production freeze negotiations hosted by OPEC, which is crucial to the restoration of balance to the oil market. Yet, KSA’s role in resolving the oil crisis has been effectively negative, and has reflected badly on both the global market place and the Kingdom’s own revenues.
However damaging, this is obviously part of a regional, competitive, geo-political collision between the two countries; a cold war of some sort that Saudi Arabia will soon no longer afford, not to mention the tension culminating between Saudi Arabia and the United States, who for decades have enjoyed a rather peculiar alliance.
That said, with the recent unravellings in the region, particularly in Egypt, Syria, and Yemen, the Kingdom of Saudi Arabia is rapidly running out of allies.
Is the Kingdom looking to make new friends in the farther East?! Or is this just a strategic shift in Saudi economic policy, intended to maintain crucial Saudi’s oil share in China, as well as an attempt to mitigate the percussions of its geo-political cold war with Iran?
On the grander scale of things, whether this move was initiated by Saudi Arabian poli-economic intelligence or enforced by Chinese interests, as KSA’s largest oil consumer, at a time so precise; the outcomes of the accord will bring much economic benefit to Saudi Arabia.
BRICS countries have devised similar systems to boost national economies and establish mutual growth and prosperity among developing and industrial member countries, despite the rather wide margin of failure! Is Saudi Arabia going down the same path?
Is it wisdom or survival that drives recent Saudi Arabian poli-economic endeavours? Will we see more accords of the sort between Saudi and other commercial traders and partners around the world soon?
If so, this is going to hurt the US dollar. Given the massive dips in the British Sterling exchange rate, and the subsequent inevitability of dips in the Euro, with the Brexit and all; this will surely reflect on the green currency.
