Aramco health adds spice to Saudi’s yuan dilemma


LONDON – Saudi Aramco is giving Mohammed bin Salman extra firepower in his beef with Joe Biden. Saudi Arabia’s $2.3 trillion oil behemoth wants to increase its maximum output as crude prices soar. That adds spice to tensions between the Saudi Arabian crown prince and the U.S. president that are spilling over into how the kingdom prices its oil.

Right now, Saudi Arabia’s crude contracts are denominated in dollars. That makes sense, given that the Saudi riyal is pegged to the dollar and nearly 25% of Saudi’s $493 billion of central bank assets are U.S. Treasuries. Abruptly repricing Saudi’s main export could destabilise the economy, and undermine Saudi’s decades-long U.S. friendship.

Those ties are in question, though. The Wall Street Journal recently reported that MbS declined U.S. pleas to increase oil supply amid the Russia crisis. On human rights Beijing will arguably ask fewer uncomfortable questions than Washington. Dollar sanctions on Russia are making some countries rethink the desirability of U.S. hegemony.

Meanwhile, China buys three times as much oil from Saudi as the United States does. The People’s Republic is Saudi’s biggest trading partner, purchasing nearly 20% of the kingdom’s goods, compared to 5% two decades ago. And Chinese telco Huawei Technologies and steel producer Baosteel are building telecoms networks and factories in Saudi Arabia, while Aramco is planning to build a $10 billion refining project in China.

Feast from the east
Feast from the east

Over the past decade, Saudi’s trade surplus with China has averaged $24 billion, Capital Economics estimates. If all trade with China were to be conducted in renminbi, the Chinese currency could within five years generate up to 25% of Saudi’s official foreign exchange reserves. If most of Aramco’s hiked output was sold to China, then this effect might be exacerbated.

A decisive China pivot by MbS is not guaranteed, though. Even if Saudi accepts yuan for 25% of its oil sales, the other 75% would still be in dollars. Given the need to protect the peg, that may lead to Saudi only repricing a portion of its crude. Still, Aramco’s rude health may encourage MbS to sell a further chunk of its shares to foreign investors to finance the transitioning of the domestic economy away from oil. If China emerges as the buyer of these shares, it would say something about how much Saudi oil winds up priced in yuan.


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