The US dollar has dominated the global oil market following an agreement between the US and Saudi Arabia in the early 1970s after the collapse of the Bretton Woods system. It created the petrodollar system, where oil is priced in US dollars, ensuring demand for the greenback and establishing its status as a global reserve currency.
The gradual rise of oil transactions in Chinese renminbi is not only a disruption of the petrodollar but a rebalancing of monetary power. The transition reflects an interplay between currency rivalry, technological innovation in digital currencies and payments, and the alternative energy 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 its quest to be a dominant player and market maker.
Trade in RMB has been expanding since 2018, facilitated by the growth of Chinese energy markets and financial instruments like crude oil futures. This development is not only transactional but also strategic: China is encouraging oil exporting nations to accept payment in RMB, which can then be reinvested into Chinese bonds, infrastructure, and technological partnerships.
But the argument for a full transition to RMB-based oil trade is relatively weaker because of the Chinese currency’s structural weaknesses, such as its partial convertibility and capital controls. These make it less appealing as a global reserve currency.
The dollar still offers unmatched liquidity, institutional depth and global confidence. Instead of a complete substitution for RMB, a more sustainable option for the immediate future is for the coexistence of dollar and RMB oil trade, where the Chinese currency grows regionally but doesn’t entirely displace the US dollar. This is also supported by the BRICS nations — originally comprising Brazil, Russia, India, China and South Africa — trading in RMB or their local currencies.
Digital currencies
There are also questions being raised on whether cryptocurrencies like bitcoin, stablecoins and central bank digital currencies (CBDCs) can disrupt the oil market.
Although cryptocurrencies can be viewed as a potential disruptor, the issue is that their operating model is contradictory to the needs of oil markets. Cryptocurrencies can only be used to price long-term contracts, which could be problematic due to volatility. Moreover, the decentralised nature of cryptocurrencies eliminates government control over strategic commodities.
But it is political acceptability and governance, not technological feasibility, that are the key hindrances. This means cryptocurrencies will not become dominant in global energy trade in the near future.
Rather, the more plausible path is for CBDCs, which combine technological innovation with regulatory supervision. China has already been brokering digital RMB programmes for cross-border settlements. This implies that the future of monetary competition will not be characterised by abandoning state-backed currencies but by their digital transformation.
In this regard, CBDCs do not break the established power bases but strengthens them.
Biggest threat
But the most decisive threat to the petrodollar system is the global shift to renewable energy. 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 the US dollar and the potential of the petro-RMB are also structurally linked to the relevance of oil itself. It’s possible that future currency dominance will not rely on resource support as much as economic fundamentals and 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 sources.
The energy transition and reduced reliance on oil is already visible in Asia. The market share of electric vehicles in Thailand and Singapore is nearly 50%, and roughly one-third in China, Indonesia and South Korea. There has also been a surge in EV sales in Europe since the war in the Ukraine.
China now generates 50% of its total overall power from renewable sources such as solar and wind.
The figure below shows the proportion of RMB-denominated trade as a percentage of global trade.
While the shift from the petrodollar to petro-RMB has already commenced, it is a nuanced move due to geopolitical considerations and trade blocs.
The more transformative force is likely to be the global energy shift, which could trigger a realignment of the oil currency trade as we know it, and a restructuring of the financial system based on innovation and economic potential rather than control of resources.
*Biswajyoti Upadhyay, former managing director, corporate and investment banking at Standard Chartered, is chairman of the global transaction banking committee at the Financial Executive Club Research Centre. Research analyst Zhao JiaYi Emilia contributed to this report.
