Shifting Away from US Dollars: Oil Trade Goes Currency Agnostic
The US Dollar’s Dominance
For decades, the US dollar has been the world’s dominant currency for international trade, particularly in the oil market. The primary reason for this has been the “petrodollar” system, established in the 1970s, which ensured that oil-producing countries would sell their oil in US dollars exclusively. This system solidified the US dollar’s role as the primary currency for global oil trade and helped maintain its status as the world’s reserve currency.
Reasons for the Shift
Several factors have contributed to the gradual shift away from the US dollar in oil trade:
- Diversification: Countries, especially those with significant oil reserves, are seeking to reduce their reliance on the US dollar to minimise the impact of exchange rate fluctuations and reduce their vulnerability to economic sanctions.
- Emergence of alternative currencies: The rise of other strong currencies, such as the euro and the Chinese yuan, has provided viable alternatives for countries looking to diversify their oil trade currency.
- Digital currencies: The increasing acceptance and adoption of digital currencies, like Bitcoin, have opened up new avenues for oil trade transactions, further diluting the dominance of the US dollar.
Non-Dollar Oil Deals
There have been several instances in recent years where oil trade deals have deviated from the US dollar:
- In 2018, China launched the Shanghai International Energy Exchange (INE), offering crude oil futures contracts denominated in Chinese yuan. This move allowed China, the world’s largest oil importer, to exert greater control over the pricing of its imports and increase the yuan’s prominence in global trade.
- In 2019, Russia and China signed a 30-year natural gas supply contract, with payments to be made in euros instead of US dollars. This deal not only facilitated the two nations’ aim to bypass the US financial system but also promoted the use of the euro as an alternative currency in the global energy market.
- Iran, facing US sanctions, has increasingly turned to trading its oil in currencies other than the US dollar, such as the euro, Chinese yuan, and even digital currencies like Bitcoin.
Impact on Global Trade and Oilfield Supply
The shift towards a more currency-agnostic oil trade landscape will undoubtedly impact global trade and the oilfield supply industry. Companies operating in the oil and gas domain will need to adapt to a more complex and fluid currency environment. This may involve dealing with multiple currencies, hedging against currency risks, and incorporating digital currencies into their payment systems.
As the global oil trade continues to move away from the US dollar, it is crucial for stakeholders in the oil and gas domain to stay abreast of these changes and prepare for a more currency-agnostic landscape. This shift not only has implications for the currencies used in trade but also for the geopolitical balance of power, as countries seek to reduce their dependence on the US dollar and explore alternative currencies for their oil transactions.