Emerging Threats to Petrodollar: A shift in Geopolitics of Oil

The politics of global oil are developing economic and political alliances. These are similar to those that existed during the Cold War. The Petro-bloc is highly political, and all countries involved in it are making continuous attempts to exert influence on each other. But in recent years, there has been a growing agreement that the dominance of the United States is diminishing to such a degree that the international system is transitioning from a unipolar global order to a multipolar order. The weakening of the petrodollar as a currency might perhaps be an indication that this shift is now taking place.

The term “petrodollar” refers to the preponderant position of the United States’ dollar. The US dollar serves as the reserve currency for international oil transactions. The fact that nations that export oil get compensated in US dollars for such exports has contributed to an increase in both the value of the currency and the demand for it around the globe. A worldwide Petro-bloc has been controlled by Russia, China, the United States of America, and the Middle East. Outside of the United States and Russia, oil companies such as Chevron, Shell, Exxon-Mobil, BP, Texaco, and Gulf Oil hold 88% of the world’s oil reserves. Due to multiple uncertainties in global politics, there has been a significant change in the geopolitical preferences of oil-exporting nations and oil-importing countries. But these geopolitical calculations would pose a danger to petrodollars in the short and long term. But this sudden shift in petropolitics has lately come to the forefront as a result of two key events. Firstly, the Russian war on Ukraine led to restrictions on imports of Russian oil. Secondly, the United States’ insistence on boosting oil output after the war was met with opposition from Saudi Arabia-dominated OPEC. This development is not unexpected given that the West, led by the United States, has imposed sanctions that have made it harder for Russia to export gas and oil. But the Middle Eastern countries did not comply with the demand of Western nations, as it would further put OPEC’s own petrodollar business in danger. Also, Middle Eastern governments did not want to artificially drive down oil prices, so they kept production levels low and did not increase their output.

In global politics, China’s influence is expanding considerably among MENA nations. China has been making efforts to lessen its dependence on US dollars for importing commodities and to contest the dominance of the petrodollar. China has been in discussions with several OPEC members, including Saudi Arabia, Iran, and Venezuela, over the possibility of pricing some of those countries’ oil sales in yuan rather than in dollars. This may have repercussions for the international energy market as well as for ties between the United States and China. OPEC and its allies are moving in the opposite direction from the present American strategy, which is to advocate for a significant fall in oil prices. Additionally, Mohammed Al-Jadaan, the finance minister of Saudi Arabia, stated in January 2023 at the World Economic Forum in Davos that there were no issues settling trade arrangements, whether in the US dollar, the euro, or the Saudi riyal. Although they have not yet done so, the Saudis appear to be considering alternatives based on recent actions. In 2022, Saudi Arabia said that it was investigating the possibility of engaging in yuan-based oil trade with China. Further, other Asian nations, including India, Pakistan, Iraq, and the United Arab Emirates, have all reached agreements with China and Russia to pay for oil using the ruble. The BRICS countries of Brazil, India, China, and Russia had begun discussions on trading oil for their common currency. Several nations were doing research to determine the potential benefits and drawbacks of exchanging oil for other currencies. The most recent challenge to the petrodollar was NORD Stream 2, which Germany transacted in euros. This would have signaled the beginning of the Petro-Euro exchange even during the Russia-Ukraine war. Even when the war was ongoing, Russia demanded that the European Union pay for oil and gas in rubles. Other nations that were purchasing oil, including India and China, were also avoiding the use of the dollar for the time being and going with other currencies instead. Even OPEC nations had shown willingness for the euro to coexist alongside the petrodollar. The Saudis were in charge of this initiative, but the United States put an end to it. This change in strategic objectives for Saudi Arabia offered a possibly imminent challenge to the strategic interests of the United States. This transition would be amplified if Saudi Arabia decided to distance itself from the petrodollar….