What is the petrodollar—and what if oil trade shifts to China’s yuan?

As tensions in the Middle East raise fresh concerns over global oil supply, questions are emerging on whether the long-standing “petrodollar” system could be challenged by China’s yuan in future oil trade.

The petrodollar system dates back to 1974, when the United States and Saudi Arabia agreed to price and trade oil using the US dollar. In return, the US committed to providing security and military support to the Gulf nation.

Over time, other members of the Organization of the Petroleum Exporting Countries (OPEC) followed suit, making the dollar the standard currency for global oil transactions. This gave rise to what is now known as the petrodollar system, referring to US dollars earned by oil-exporting countries.

For decades, the system has remained stable. But recent geopolitical developments, particularly in the Middle East, have sparked discussions about a possible shift to the Chinese yuan, or what some analysts call the “petroyuan.”

According to research cited in the explainer, ongoing tensions and attacks on oil infrastructure, as well as new payment arrangements in key shipping routes like the Strait of Hormuz, could push some transactions toward the yuan.

Still, economists say a full shift away from the dollar is unlikely in the near term.

“Hindi ganun kadali ‘yun. Kasi una, ano ba ‘yung pinakaginagamit na currency sa buong mundo? So dollar pa rin naman,” said Michael Ricafort, chief economist of Rizal Commercial Banking Corporation.

(It’s not that easy. First, what is the most widely used currency in the world? It’s still the dollar.)

Ricafort noted that while alternative currencies like the yuan and euro are gaining traction, the dollar remains dominant due to its widespread use and stability.

Another economist said framing the issue as a simple choice between the dollar and yuan may be misleading.

“Yung usapin ng 'is it the US dollar or the yuan' ang pagpipilian… medyo alanganin ‘yung ganoong klaseng binary kasi… hindi pa nga ‘yung yuan ‘yung mas malaki ngayon eh compared to the dollar. Mas ‘yung euro pa ang ginagamit,” said Sonny Africa, executive director of IBON Foundation.

(The question of whether it’s the US dollar or the yuan is somewhat misleading… the yuan is not even larger than the dollar at present. In fact, the euro is more widely used.)

Africa added that global confidence in a currency depends on factors such as openness to investment and financial systems—areas where China still maintains tighter controls.

Experts also warned that using multiple currencies in oil transactions could lead to what is called “fragmentation” in global markets.

This could result in:

• Higher transaction costs
• Pricing inefficiencies
• Greater volatility in global oil prices

For the Philippines, the impact of a potential shift may be limited.

“Ninety-nine percent ng langis natin ay imported. Habang nandyan ‘yung oil dependence na ‘yan, anuman ang currency na ginagamit mo… problema pa rin ‘yun sa Pilipinas,” Africa said.

(Ninety-nine percent of our oil is imported. As long as that dependence exists, whatever currency is used… it will still be a problem for the Philippines.)

He said that while having alternative currencies could provide some flexibility, it would not necessarily bring down fuel prices.

“Hindi pag-shift ng currency ang solusyon… Ang solusyon dyan… shift to renewables, shift to electric vehicles, pagpaparami ng public mass transport,” he added.

(Shifting currencies is not the solution… The solution is transitioning to renewables, electric vehicles, and expanding public mass transport.)

For now, analysts say the petrodollar system remains firmly in place. But with shifting global dynamics and rising geopolitical tensions, discussions around alternatives like the petroyuan are likely to continue. —With research and information from GMA News Feed/Sherylin Untalan/MCG, GMA News