Over the past half-century, U.S. Treasury bonds have served as the primary foreign exchange reserves for many central banks worldwide, largely due to the long-standing dominance of the U.S. dollar in global commodity transactions, including oil. As former U.S. Secretary of State Dr. Henry Kissinger once succinctly put it, "If you control oil, you control the economy of all nations; if you control currency, you control the world." However, today, the U.S. economy may be losing its grip on global oil and currency control.
The new development stems from Saudi Arabia, the leading nation of the petrodollar system. According to the U.S. Treasury's latest report on international capital flows released on July 18, which follows a two-month lag, Saudi Arabia sold $1 billion worth of U.S. Treasury bonds in May, with current holdings at $114.7 billion.
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Looking at a longer timeframe, Saudi Arabia's holdings in February 2020 were $184.4 billion, which means that over the past two years, Saudi Arabia has cumulatively sold $69.7 billion worth of U.S. Treasury bonds, a reduction of nearly 38%. This indicates that Saudi Arabia seems to be gradually moving away from its preference for U.S. Treasury bonds, a core U.S. dollar asset. This is considered to have far-reaching implications for the future trend of the petrodollar.
Due to the petrodollar agreement signed between Saudi Arabia and the United States in the 1970s, the U.S. dollar became the global commodity transaction currency, and U.S. Treasury bonds subsequently became foreign exchange reserves for many central banks worldwide. The petrodollar was also a substitute sought by the U.S. Treasury after the dollar's separation from gold, with the aim of further supporting the global use and currency dominance of the dollar. The agreement stipulated that Saudi Arabia would sell oil priced in U.S. dollars and use the oil revenue to purchase U.S. bonds and securities. Clearly, as Saudi Arabia continues to distance itself from U.S. Treasury bonds, it will directly affect whether the dollar can continue to serve as the king of global commodity currencies in the long term.
It is worth mentioning that several weeks ago, Saudi Arabia initiated the use of cryptocurrency for settlement in trade with another oil nation, the United Arab Emirates (UAE), to avoid direct use of the U.S. dollar. A Saudi businessman, in an interview with BWC Chinese website journalists, stated that this could reduce the risk of U.S. dollar interest rate differentials, allowing for more actual profits in trade with UAE merchants.
Not only that, but India's purchase of Russian oil has surged. Russian media reported that in the first half of this year, India has continuously broken through the restrictions of the U.S. dollar, increasing its purchase of Russian oil by five times. Other foreign media reported that Russian traders offered "attractive" discounts to Indian buyers and accepted payments in Indian rupees and UAE dirhams. Notably, Russian media cited the latest report from the International Energy Agency (IEA), showing that Russia's revenue has increased by 50% year-on-year. This again indicates that the U.S. economy may be losing control over global oil and currency.
With the U.S. Consumer Price Index (CPI) rising by 9.1% year-on-year in June, the largest increase since 1981, the U.S. dollar is also continuously losing purchasing power. The U.S. economy unilaterally believes that Saudi Arabia can promote OPEC+ (Organization of the Petroleum Exporting Countries plus) to reach an international crude oil production increase agreement, thereby suppressing high U.S. inflation through lowering oil prices in the future, and thereby enhancing the purchasing power of the U.S. dollar. However, Saudi Arabia's response was to only increase its crude oil production capacity to 13 million barrels per day, an increase of 1 million barrels compared to before, and limited to this quantity, after which Saudi Arabia will not have the ability to further increase production. For the U.S. market, which is in danger of inflation, this is just a drop in the bucket.
Saudi official Adel al-Jubeir stated that whether Saudi Arabia will increase production in the future will be based on a continuous assessment of the market. Saudi Arabia will consult with OPEC+ members, including Russia, based on demand... Oil is a commodity, not a tank, you can't aim and fire it... This further indicates that the Saudi economy is once again saying no to the U.S. economy.
What surprised the market even more was that Saudi Arabia, as the world's largest oil-producing country, doubled its import of Russian crude oil. According to shipping data, in the second quarter of this year, Saudi Arabia imported 647,000 tons of fuel from Russia through Russian and Estonian ports, compared to 320,000 tons in the same period last year. Analysts believe that Saudi Arabia may be purchasing Russian crude oil at low prices and reselling it to the U.S. and European markets. Even Saudi Arabia is significantly purchasing Russian crude oil, which clearly shows that the U.S. economic plan to restrict Russian oil exports with the U.S. dollar is actually failing.
Not only that, but India's purchase of Russian oil has surged. Russian media reported that in the first half of this year, India has continuously broken through the restrictions of the U.S. dollar, increasing its purchase of Russian oil by five times. Other foreign media reported that Russian traders offered "attractive" discounts to Indian buyers and accepted payments in Indian rupees and UAE dirhams. Notably, Russian media cited the latest report from the International Energy Agency (IEA), showing that Russia's revenue has increased by 50% year-on-year. This again indicates that the U.S. economy may be losing control over global oil and currency.It is worth mentioning that, according to a report by the Russian media outlet "Russia Today" on July 20th, citing Reuters, based on customs data, in June, Russia maintained its position as China's largest crude oil supplier for the second consecutive month. In May, Russia exported 8.42 million tons of crude oil to China, setting a record and surpassing Saudi Arabia to become China's largest crude oil supplier. In June, China imported 7.29 million tons of Russian crude oil, including oil transported through the "East Siberia-Pacific Ocean" oil pipeline and oil transshipped from European ports and Russian Far Eastern ports. Although this was lower than the record-breaking import volume in May, it was still 10% higher than the same period last year. The foreign media further reported that since the beginning of the year, China has imported 41.3 million tons of crude oil from Russia, an increase of 4% compared to last year.
In terms of U.S. debt, according to the latest report from the U.S. Department of the Treasury, China sold $22.6 billion worth of U.S. Treasury bonds in May and was the largest seller of U.S. Treasury bonds in both April and May of this year. China's holdings of U.S. Treasury bonds have fallen below $1 trillion for the first time since June 2010 (12 years ago), with the holdings now standing at $980.8 billion.
Since December last year, China has sold U.S. Treasury bonds for six consecutive months, with a total sale amounting to $100 billion worth of U.S. Treasury bonds. The BWC Chinese financial team, upon reviewing historical data from the U.S. Department of the Treasury, noted that China held a total of $1.3167 trillion in U.S. Treasury bonds in November 2013. This means that over the past nine years, China has sold a cumulative total of $335.9 billion worth of U.S. Treasury bonds, with a cumulative sale ratio of nearly 26%. The total amount sold is $41.8 billion more than the $294.1 billion held by Switzerland, the fourth-largest foreign holder of U.S. debt.
At the same time, the latest data from the U.S. Department of the Treasury shows that at least 21 countries worldwide, including Japan and Israel, sold U.S. debt to varying degrees in May. The U.S. financial website Zerohedge analyzed that against the backdrop of the United States' difficulty in curbing inflation and the continued interest rate hikes by the Federal Reserve, the wave of U.S. debt selling will continue. When Saudi Arabia also begins to heavily short U.S. debt, the impact on the status of petrodollars may be inevitable.
Therefore, the initiative to sustain the U.S. debt-economy model further lies in the hands of a few major global buyers. The Russian Satellite News Agency previously cited expert analysis suggesting that major global buyers may sell up to $700 billion worth of U.S. debt. If this happens, it implies that the U.S. economy may further lose control over petrodollars, and its advantages will gradually fade away.