The US dollar’s dominance is in decline as Russia and Saudi Arabia eye the Chinese yuan for oil trades, and investors may need to begin to revise their long-term investment strategies, warns the CEO and founder of one of the world’s largest independent financial advisory and asset management companies, deVere Group.
The warning from Nigel Green says the shift in how global oil trading is carried out will have far-reaching consequences for economies and, therefore, investors around the world.
“One of the most significant but under-reported outcomes of April’s three-day summit between Russia’s Vladimir Putin and China’s Xi Jinping was that Putin said Russia is now in favour of using the Chinese yuan for oil settlements,” said Green. This suggests that the world’s second-largest economy and the world’s largest energy exporter are actively intending to reduce the dominance of the US dollar as the bedrock of the international financial system.
“Separately, two deals… would see Saudi Arabia’s Aramco supplying two Chinese companies with a combined 690,000 barrels a day of crude oil, bolstering its rank as China’s top provider of the commodity,” added Green. “It has been reported that Saudi Arabia is also in talks with Beijing to settle with the yuan instead of the dollar.”
Aramco is one of the largest oil producers in the world and is fully owned and controlled by the Saudi Arabian government.
It appears US rivals, led by China, are forming a new major economic bloc. If Saudi Arabia – home to massive oil reserves, which are estimated to be the largest in the world – does move to the yuan that would lead to an enormous shift in the global economic system.
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“Oil is one of the most important and widely traded commodities in the world, and it has traditionally been priced and traded in US dollars,” said Green. “This has given the US dollar a dominant role in global financial markets as countries that want to purchase oil must first acquire US dollars in order to do so.”
If oil trading were to shift away from the US dollar it would dramatically reduce the demand for US dollars, which would lead to a decrease in the value of the US currency.
“This could have a number of ripple effects throughout the global economy, including hugely increased inflation in the US and potentially destabilising effects on financial markets,” said Green.
Additionally, a shift away from the US dollar in oil trading could lead to greater economic and geopolitical competition between countries. If the yuan were to become more widely used in oil trading, this could significantly increase the economic power and influence of China, challenging the dominance of the US in major global affairs.
These shifts are not just theoretical, they are “beginning to happen in real time”, said Green, meaning investors may need to begin to revise their portfolios.
“If oil were priced and traded in a different currency, investors would be exposed to currency risk as the value of the currency could impact the value of their investments,” he added. “They would need to consider the potential impact of currency fluctuations on their portfolio and may need to adjust their holdings accordingly.”
There are also industry-specific risks. “Companies that generate significant revenue from oil production or related services would be impacted by changes in the currency used for trading,” said Green. “Investors with exposure to these types of companies would need to evaluate the potential impact of a shift away from the dollar on their investments.”
Oil is a critical input for many industries, and changes in the price of it can have enormous, far-reaching implications for the global economy. If oil were no longer traded in US dollars, it would impact the global financial system and would have ripple effects throughout the world economy.
“Investors who are serious about building their wealth for the long term need to be alive to the impact of the dollar’s decline, not in the future but now,” concluded Green.