Petro-dollar, the term used to measure global oil trade channelised through the US dollar. Since the 20th century, international oil settlements have been accelerated predominantly in the US dollar. Across the geopolitical chessboard, historically, those who control the energy chokepoints and oil supplies tend to mark a hegemonic footprint. In this backdrop, the global oil trade fundamentally channelized through the US dollars, indeed formed the bedrock of the American hegemony in the geopolitical calculus.
For decades, more than 80 per cent of the global oil trade is propelled through the US dollars, thus the American currency gained the title of being a “petro-dollar”, a synonym for energy trade championed in the US currency. However, this dominance is depleting gradually and alternative petro currencies are emerging in the global energy market. This structural shift in the oil trade is catalysed by the BRICS nations. Additionally, the European Union is also embarking on the path of BRICS, thus denouncing its extreme alignment with the US. These new strategic propositions drawn by the global economies have indeed pushed the petro dollars thereby the US strategic superiority into a paradoxical situation.
World nations warn against over reliance on the US dollars
Dollar, for decades was considered as the most dominant, stable and reliable currency in the forex market to conduct international transactions. It was characterized with least volatility. However, this definition is undergoing a fundamental shift and the global currency map is being redrawn by the BRICS and European economies. The US dollar is no longer considered as a safe-haven and most stable or reliable currency ecosystem. For example, Christine Lagarde, the Head of the European Central Bank and Former Chief of the International Monetary Fund(IMF) recently reiterated that extreme dependence on the US dollar is not feasible and not good for the health of the domestic economy or the multipolar world order.
This shift in the strategic thinking of Europe has been triggered in recent years mainly by the irrational, transactional and assertive policies of the US President Donald Trump. On the other hand, the BRICS economies are on the path of de-dollarisation for a long-term now and are aiming for economic independence, self-reliance in global trade and strategic autonomy. This firm strategic sovereignty and liberty exclaimed by the world-nations devoid of the dependence on the US, is gradually dismantling the hegemony of Washington DC in the geopolitical latitude.
What do the latest trends echo?
The strategic weightage espoused to the US linked financial systems are gradually eroding as the world-nations have reiterated the trust deficit on the US political policies, economic credentials and unpredictable fiscal status. 100 per cent oil trade by using the petro-dollars as the benchmark is no longer a reality. The dollar dominance is dismantling and oil trade in alternative currencies is evolving as a geopolitical reality.
For example, as per the latest data, more than 20 per cent of the global oil trade is settled in other petro currencies apart from dollars. BRICS nations are swiftly crafting alternative payment mechanisms using local or regional currencies. Also, the European Union has called for the strengthening of the Euro in the global oil trade paradigm and other domains. For example, China predominantly conducts oil trade in local currency and has drifted away from the dollar. Beijing uses Chinese Yuan to purchase oil from Russia, Iran and Saudi Arabia.
Similarly, Russia uses its ruble to export oil to China and India. Likewise, India purchases the oil from Russia through rupee-ruble mechanism. The BRICS nations also are working more swiftly with a resolve to strengthen the local currencies for global trade. These transactions comprise more than 20 per cent of global oil trade thus signalling gradual subsidence of the dollar dominance. As an impact, the global reserve currency in the US dollars has drastically reduced from 71 per cent to 56 per cent. Nations are also denouncing their investments from the US treasury holdings apart from detaching with the petro dollars. All these developments are leading to dwindling of the US dollar as the hegemonic currency.
Reasons underlying the paradox of petro dollars
The world economies are cutting away from the US treasury holdings, petro-dollars and other forms of dependence on the US currency. The reasons are many. However, the apex motive is to protect the domestic economy from the volatilities of the US economy characterised by the irrational policies of the Trump administration. For example, over dependence on the US dollar for international transactions and considering the US treasury bonds as stable investment sources is no longer considered feasible. This is due to soaring inflation, fiscal cliff and other hiccups within the US.
The other reason is to erect a balance of power and multipolar world order, when the Trump administration is seeking to weaponise dollar and energy to achieve US hegemony. World nations deem the unsound, hyper transactional and self-centric policies of the US President as a threat to domestic and comprehensive global stability in the long-run. To avoid this strategic risk, world economies are aiming to diversify their sources of investment and use local currencies for bilateral transactions. Ultimately, these strong strategic predispositions escalated by the BRICS or the EU is leading to tremors in the US hegemonic architecture.
Dollar subsidence is gradual, yet a clear strategic signal
The quest for alternative petro currencies, devoid of the petro dollars is thus a strategic reality. The ongoing geopolitical manoeuvring by the world nations is indeed fracturing the dollar dominance and the US hegemony. However, the collapse is not sudden and swift. It is gradual subsidence. For example, the dollar still comprises more than 55 per cent of the global reserve currency. However, the alternate currencies are firmly encapsulating the foreign exchange market, scripting a way forward for multipolar currency order and the US has to accommodate and adopt with other currencies in the long-run. As said, though this is a gradual subsidence, it is a clear and solid signal interrogating the US hegemony. Debunking the petro dollars is thus pushing the US superiority into a paradoxical state as the world nations champion strategic autonomy and economic or geopolitical sovereignty.
