Impact of Oil Market Fluctuations is Hastening the Migration from Petrodollars to Petro-RMB

Author: Biswajyoti (BJ) Upadhyay

Chairman, Global Transaction Banking Committee 

Financial Executive Club (FinEx Club) Research Centre

Research Analyst: Zhao JiaYi Emilia

The US dollar has long dominated the world oil markets to support the petrodollar system, which has consolidated financial and geopolitical power since the early 1970s following the collapse of the Bretton Woods system, leading to an agreement between the USA and Saudi Arabia. The gradual rise of RMB-based oil transactions is not only a disruption but also a rebalancing of monetary power. This transition reflects an interplay between currency rivalry, technological innovation in digital currencies and payments, and the alternative energy system revolution across the globe.

The fundamental element of this shift is the expanding role of RMB in the oil supply chain, due to a strategic change in China’s energy needs and the quest be a dominant player and market maker. The trade in RMB has been continually growing since 2018, which is facilitated by the growth of Chinese energy markets and financial instruments like crude oil futures (Chen and Gummi, 2023). This development is not only transactional but also strategic: oil-exporting nations in association with China, are encouraged to accept RMB (as an alternative option to USD), which can be reinvested in Chinese bonds, infrastructure, and technological partnerships. According to Kamel and Wang (2019), the rise of a petro-RMB is linked to geo-economics alignment rather than market efficiency alone.

The argument for a full transition from USD based oil trade to RMB oil trade relatively is weaker outcome despite the growing volumes. RMB’s structural weaknesses, such as its partial convertibility and capital controls, make RMB less appealing as a global reserve currency (Eichengreen and Kawai, 2014). Conversely, the US dollar still offers unmatched liquidity, institutional depth, and global confidence. Huang and Lynch (2013) state that having one international currency is impossible without open financial systems and China has only partially adopted this thus far. Hence, rather than a complete substitution to RMB, a more sustainable option for the immediate future is a coexistence of USD and RMD oil trade, wherein RMB grows regionally, but not entirely displacing the USD. This is also substantiated by BRIC nations trading in RMB or their local currency.

There are also questions being raised about whether alternative digital currencies like cryptocurrencies e.g., Bitcoin, stablecoins, and Central Bank Digital Currencies (CBDCs) can disrupt the oil market. Although cryptocurrency, e.g., Bitcoin, can be viewed as a potential disruptor, its operating model is contradictory to the needs of the oil markets. It can only be used to price long-term contracts, which could be problematic due to volatility, and the decentralized nature eliminates governmental control over strategic commodities. The technological feasibility is not the problem; the political acceptability and governance are the key hindrances. This means that cryptocurrencies will not attain a dominant position in global energy trade in the near future.

Rather, the more plausible path is for Central Bank Digital Currencies (CBDCs), which combine technological innovation with regulatory supervision. According to Chan and Zi (2022), China has already been brokering digital RMB programs, positioning it to improve cross-border settlements. This implies that the future of monetary competition will not be characterized by abandoning state-backed currencies, but by their digital transformation. In this regard, CBDCs do not break the established power bases; on the contrary, they strengthen them.

Perhaps the most decisive point, however, will be outside currency competition altogether. The global shift to renewable energy poses a threat to the petrodollar system. The less a country relies on oil, the less strategic will be the currency in which it is priced. This means that the power of USD and the potential of the petro-RMB are also structurally linked to the relevance of oil itself. Lai (2015) suggests that future currency dominance will not rely on resource support as much as on economic fundamentals as well as technological advancement and industrial potential. This shifts the argument from which currency is in control of the oil trade, to which economy defines the future of global production in alternate energy source thereby being an energy substitute to Oil & gas. The energy transition and reduced reliance on oil is already visible in Asia: market share of EV cars in Thailand and SG is nearly 50%. In China, Indonesia and South Korea, this share is roughly one third. There is a surge in EV car sales in Europe post the Russia - Ukraine war. In terms of alternative energy use, China now generates 50% of its overall power from renewable sources (solar, wind, etc.)

The figure below reveals proportion of RMB denominated trade as a percentage of global trade.

In conclusion, the shift from the petrodollar to petro-RMB has already commenced, albeit nuanced due to geopolitical considerations and trade blocs. It is a process of diversification shaped by geopolitical alignment, institutional constraints, and technological advancements. Cryptocurrencies are unlikely to make a significant change in this direction, and CBDCs can accelerate it in a state-regulated system. However, in the end, the more transformative force is the world energy shift, which could trigger a realignment of the oil-currency trade as we know it, and the financial system can be restructured based on innovation and economic potential rather than control of resources alone.

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