Monday, June 10, 2024 marked the first international business day since the expiration of the 1974 Agreement on Military and Economic Aid The agreement signed between the Nixon administration and Prince Fahd Ibn Abd al-Aziz Al Saud. Saudi Arabia is now free to sign oil trade agreements that involve payment in any currency, whereas it was previously limited to the U.S. dollar. While the real impact of the end of this agreement will only become apparent over time, it is difficult to envision a future in which the U.S. dollar’s status as the dominant reserve currency among the G77 countries of the United Nations is not threatened. In 1999, the U.S. dollar accounted for 71% of global foreign exchange reserves, which had fallen to 58% in 2022.
Could Nixon and Kissinger have predicted the current economic climate? Perhaps in part. Russia and the United States are once again at odds, but not directly at war. The opinions of Middle Eastern states still matter, although the term “buffer state” has much less relevance in an age when any organized (or disorganized) group of people with access to the Internet can broadcast propaganda directly to computers, smartphones, smartwatches… the list goes on. Kissinger, who died only last November, believed until his death that Russian-American relations were even more strained than under Brezhnev. years of his term as prime minister. But, more importantly, neither could have foreseen what the petrodollar would be replaced by after its demise: the petroyuan. This is due, to some extent, to China’s infinitely stronger economic position, with Hong Kong (increasingly) under its jurisdiction – a utopian dream without the integrity that Britain has shown in its adherence to the 1898 Convention (it should be borne in mind that the modern Chinese state only came into being fifty-one years after the Convention was signed).
Among the G77 countries, the local and regional reasons for this decline are numerous. One of the main lessons of the 2008 financial crisis is that globalization has more often than not led to the creation of economies that are in reality more regional and local in terms of capital accumulation and distribution. However, the vast majority of these economies have only been facilitated by the rapid growth in the size of the Chinese economy. Saudi King Mohammed bin Suleiman’s decision not to renew the 1974 agreement will only accelerate this growing dependence. Few other countries have access to the resources that can provide an oil currency. Renminbi (RMB) foreign exchange reserves will increase, taking advantage of the vacuum created within a system where a bargaining chip dominates. These changes are only good news for Chinese soft power strategists in the Politburo and/or private business leaders. This assessment seems vague, but it necessarily is. There is little credible public information about the true demarcation between state and private enterprise in China, during the twelve years that Xi Jinping has had to consolidate his reforms towards authoritarianism. Nevertheless, we have enough information to make some general predictions.
The G77’s sympathies toward the U.S. government vary widely, meaning that pre-existing roles will likely be reinforced. Consider Asia first. Eyes will be on Singapore, which has consistently demonstrated a degree of economic loyalty to the United States since the splendor of U.S. foreign aid spending in the early 1960s, before the signing of the 1974 agreement. For a country of its size and population, Singapore has an impressive number of Reserves in USDIndeed, despite China’s attempts to win over Singapore’s large ethnic Chinese population through various forms of media influence, the country’s leaders still balk when Singapore is described as a “Chinese country,” insisting that even though the majority of its population is of Chinese descent, its values and worldview are unique. consumption of petroleum products continues to increase, Despite progress in producing “greener” energy, the Petroyuan will cause divisions among an increasingly politically savvy population.
Other countries, such as Vietnam, have seen major improvements in their relations with the United States since 1974, but will never enjoy the same instinctive partnerships that the United States has forged with Singapore. Then there is the Philippines, whose location in the South China Sea is strategically important for the transport of oil to (and from) Chinese ports. The Philippines’ relationship with the United States is probably the most complex of any Asian country, having been annexed as an unincorporated territory during its struggle against Spanish rule in the late 19th century.th and early 20sth The United States is well regarded in the Philippines, with approval ratings hovering around 90%. However, Rodrigo Duterte’s tenure (2016-2022) has shown that the country’s loyalty can be easily tested, with him stepping up trade with Chinese brands linked to oil production during his premiership. In 2018, Volkswagen Philippines switched its model lineup exclusively to Chinese-made models for its domestic market. While the US position has been relatively stable under Marcos, a recapitulation toward China would damage America’s soft power advantage in Southeast Asia more than it did in the previous decade.
The hodgepodge of ASEAN reactions to the end of the dollar oil purchase law will weigh heavily on the development of Brazil’s economy. The South American industrial heavyweight’s interest in trade with Southeast Asia is well documented in the resources its government has recently invested in Improving relations with countries like IndonesiaSaudi Arabia is also caught between the two superpowers and has good reasons not to engage with either. Yet last year, Saudi Arabia exported nearly $4.8 billion worth of crude oil to Brazil.
And what about Iran, another geographically large country, which has mixed feelings about its role as a beneficiary of Anglo-American soft power? Iran’s direct contribution to China’s wealth resulting from the end of the petrodollar deal is minimal: Iran produces its own oil, and its relations with Saudi Arabia are strained, with ethnic and religious contexts that transcend the economics of the oil trade. In short, Iran will not become a trading partner. However, there will be imminent changes in China’s auto export market, of which Iran is already a part. a major consumerOil for cheap cars: It is reasonable – almost predictable – to suggest that China buys oil from Iran in RMB. Proportionately, the most profound change will occur a little further south of Iran: the sub-Saharan subcontinent. Over the past twenty years, China has intensified its stadium diplomacy efforts in Africa over the past decade. And Chinese developers have also diversified into infrastructure. More construction projects in Africa means more Chinese fuel consumed, more Chinese vehicles on the road, and more RMB reserves. In short, the petroyuan will effectively function as a discount card for infrastructure development in the region.
Finally, there is Oceania. Australia and New Zealand’s American loyalty seems a given, with landmark agreements such as the Australia-New Zealand-United States (ANZUS) Security Treaty of 1951 and, more recently, the Australia-United Kingdom-United States (AUKUS) Treaty of 2021. Nevertheless, money talks. In Australia, road trains still carry the income and livelihoods of many remote communities. Although the country produces an abundant supply of oil, annual crude oil production has steadily declined by 16,570 to 5,210 megaliters between 2012 and 2024. The rise of the Petroyuan has not come a moment too soon when it comes to China’s soft power on the continent. Australia and New Zealand have both suffered significant Chinese interference in the right to free speech in their respective countries. Media and academiaProtests and government promises usually come to nothing, with $2 billion being invested by the Chinese state in Australia in 2022 and 2023.
The end of the petrodollar deal and the rise of the petroyuan will have repercussions on the inflows and outflows of the global economy. Xi Jinping and the Chinese Communist Party have been waiting for such a policy shift. It would be foolish to underestimate the impact that the petrodollar deal has had on national economies around the world over the past half-century. With a crucial election approaching, the United States would do well to meet in a bipartisan manner with the new British Labour government to discuss economic opportunities. With the hostilities of the Israel-Hamas war and the Russian invasion of Ukraine, protecting oil interests is more important than ever.
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