The US-Israel war in Iran could weaken the historical dominance of the US dollar in the oil-rich Middle East and strengthen a “petroyuan” alternative supported by the Chinese currency, according to analysts at the European central bank.
The fallout from the almost month-long conflict was to test the “petroleum regime’s foundations”, while the damage to the Gulf economies “could encourage stability in their holdings of foreign assets”, Deutsche Bank analysts said in a research note published on Tuesday.
“If the Gulf moves closer to Asia in its trade and investment relations and ultimately lower oil prices in dollars, there may be significant effects on the use of dollars in international trade and savings,” they added.
Most of the oil traded internationally is priced and invoiced in US dollars under a system that dates back to the 1974 petroleum treaty. Under the agreement, Saudi Arabia agreed to price oil in US currency and invest excess in US dollar assets to secure collateral.
The arrangement supported global dollar value chains, given the central role of oil in global production and transportation, analysts said.
But pressures on the system have increased in recent years. Oil concessions by Russia and Iran already trade in non-dollar units, and Saudi Arabia has experimented with non-dollar payments for infrastructure projects, Deutsche Bank analysts said.
Meanwhile, China launched yuan oil futures in 2018, though petroyuan contracts it is still much smaller than US dollar-based contracts due to Beijing’s capital controls and the yuan’s small exchange rate.
