BRICS expansion could end US dollar dominance in oil trade: US financial experts

NEW YORK: With the BRICS emerging as a major trading bloc with its expansion of six more countries, including Saudi Arabia, since the last South African meet, question bothering many traders in the US is, whether it will end the era of petrodollars particularly in the oil business.

While there is no such currency as a Petrodollar, the US currency, the dollar or the greenback is the medium in which most global trade is conducted among nations around the world. The world buys oil from the Middle East in dollars and that's how the word petrodollar stuck for the earnings of the Arab countries from sale of crude and POL (Petroleum, Oil and Lubricants).

The concept of the petrodollar has been a central element in global economics and geopolitics for decades. It refers to the practice of trading oil in US dollars, which has provided the US with significant economic and political advantages. However, in recent years, there has been speculation about the decline of the petrodollar and the rise of new alternatives, US financial analysts say.

Blog run by some financial experts has explored the question the most frequently asked question (FAQ) among US traders: Is the petrodollar dead? What BRICS (Brazil, Russia, India, China and South Africa) actually wants and how it relates to the petrodollar.

Is the Petrodollar Dead? End of Petrodollar Dominance: Some financial investors and analysts argue that the petrodollar's dominance is waning. The rise of renewable energy sources and shifting dynamics in the global oil market has led to reduced dependence on oil and, subsequently, the US dollar

The BRICS Perspective: BRICS has played a role in challenging the petrodollar. They've discussed alternative currencies for oil trading, which could undermine the dollar's status as the primary reserve currency.

What Does BRICS Want? The Geopolitical Shift: BRICS aims to reshape the global geopolitical landscape. By adding new members, like Persian Gulf states, they demonstrate a commitment to expanding their influence beyond their original group. They want to challenge the dominance of the petrodollar.

The inclusion of oil-rich nations like Saudi Arabia and Iran in BRICS could be a strategic move to challenge the petrodollar system, which has been traditionally US-centric, analysts say. BRICS dominated by India and China seeks to enhance economic cooperation, trade, and development among themselves and reduce dependence on Western-dominated financial institutions.

The Geopolitical Rivalry: BRICS presents a real challenge to Western dominance, particularly the US. Its expansion and ambitions signify a tectonic shift in the global balance of power. The fate of the petrodollar is a complex and evolving issue. While it may not be entirely dead, there are significant challenges to its dominance.

BRICS, with its growing influence and ambitions, plays a role in reshaping the global economic and geopolitical landscape. As these dynamics continue to unfold, it's crucial to monitor how they impact the world's financial systems and power structures, financial analysts in Wall Street say.

Inside Wall street, a highly informative journal and news mailer that analyses global trading trends and currency movements, says oil is now being purchased outside of the petrodollar system. That's the same system that has helped make the US so powerful for the past few decades.

Now, Russia is using China's yuan to settle 25 per cent of its trade with the rest of the world.

A lot of changes are happening in the oil markets -- and they mean a lot in terms of implications for the future dominance of the dollar. It's time to unpack what petrodollars are and aren't.

The OPEC-Petrodollar Relationship Effect

There's no real currency that's a petrodollar. The term "petrodollar" grabbed international attention in the 1970s oil crisis, when there were gas lines and historic price spikes. That was after Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela established the Organisation of the Petroleum Exporting Countries (OPEC) in 1960.

Their goal was to unify oil policies for member countries based on the thinking that there is power in joining together. You can see that influence today. It shows OPEC's share of world crude oil reserves. It controls about 80 per cent of the market. Analysts often refer to the OPEC as the most powerful oil cartel in the world who can drop or push up prices with a single decision to cutback or increase oil production across members countries. But its not mandatory.

As early as in the 70's, oil exporting nations chose to let global oil sales be denominated in US dollars with the logic that the US dollar was the most widely used, liquid, and reliable and stable currency. That logic still holds true even today.

In 1974, Saudi Arabia agreed to use petrodollars to buy US Treasury bonds. It was one of the earliest petrodollar deals. Since then, Saudi Arabia and other governments have purchased US military weaponry and other products with petrodollars. Behind the curtain, though, there's a hidden truth: There's no law that oil exporters must accept US dollars for their oil, Dr Noris, a financial expert wrote on Inside Wall Street.

Governments can decide what makes the most sense for them economically and geopolitically. And today, a new power is emerging… the BRICS+ governments.

BRICS+ Turning Away from the Petrodollar? The BRICS+ powers have been making deals to buy OPEC+ oil in the most prominent currency they can access -- the Chinese yuan. Now, the "petroyuan" is emerging. BRICS stands for Brazil, Russia, India, China, and South Africa. New Middle East countries are being added and the expansion continues in the hope it can emerge as a major trading bloc that can guide and create a new economic order in global trading as opposed to the Euro and the US dollar.

And the BRICS are now becoming the BRICS+ thanks to six new members, including Saudi Arabia and the UAE. That means the BRICS+ will include the two largest oil suppliers in the world, Saudi Arabia and Russia.

This year, China began using the yuan for most of its energy imports from Russia. India's largest refinery, Indian Oil Corp, and two other refineries there began paying in yuan for some of their Russian oil imports, too. China has also asked Middle Eastern suppliers to accept the yuan rather than dollars in oil trades.

All of this shows that more and more oil is being purchased outside of the petrodollar, Dr Noris said the era of Russia and China's De-Dollarisation seems to have begun. To be clear, a complete and total shift away from Petrodollars won't ever happen. Markets are too embedded in global oil trade.

But tiny cracks are showing. And a shift is happening. The two leading oil export and import BRICS countries -- Russia and China -- are championing the shift, Inside Wall Street said .

Russia now tops China's oil import list. It took that spot from Saudi Arabia this year. So here's the situation. China needs oil, and Russia has it. That means dollars don't have to play a role in China and Russia's oil trade anymore. The two countries are also trading more with each other in Chinese yuan.

These developments are due to two main factors. The first is the freezing of Russia's foreign bank reserves by the West after Russia invaded Ukraine in February 2022. The second is that Russia has led the charge for BRICS and others to de-dollarise trade since the financial crisis of 2008, followed by calls from China, the journal said.

Russia is now using China's yuan to settle 25 per cent of its trade with the rest of the world. Throughout the year, China has been building up its Russian crude oil reserve. And that hit its highest level in three years which drove oil prices up further.

There is no indication that these purchases will slow down. In fact, one of China's state-owned petroleum groups is set to double its imports of crude oil from Russia this year. So, while the dollar isn't going away anytime soon, neither is the petrodollar.

The US dollar is used in nearly 90 per cent of all foreign exchange transactions. Half of global trade and three-fourths of Asia-Pacific trade is denominated in US dollars. Most of the world's oil transactions still occur in dollars. All of those transactions account for billions of dollars every day.

But, the shift away from the dollar is happening. It's a death by a thousand cuts, Dr. Noris said, adding oil giants -- Saudi Arabia and the UAE -- will become part of the BRICS+ in January 2024. That means world oil exports could undergo even more major changes.

As more governments buy and sell oil in non-dollar currencies, it will reduce the breadth of the petrodollar and, ultimately, the amount of dollars used for global trade.