Another Blow to the Petrodollar: India and the UAE Complete First Oil Sale in Rupees

In another blow to dollar dominance, India and the United Arab Emirates settled an oil trade without converting local currencies to dollars for the first time on Monday, as India’s top refiner made a payment for oil in rupees.

Indian Oil Corp. bought a million barrels of oil from Abu Dhabi National Oil Company in a dollar-free transaction.

The oil sale was the first after the two countries entered a Memorandum of Understanding (MoU) in July. The deal established the Local Currency Settlement (LCS) system, facilitated by the Reserve Bank of India and the Central Bank of the United Arab Emirates. The system allows the two countries to engage in bilateral trade using the rupee and dirham. According to a statement by the Reserve Bank of India, the agreement will facilitate “seamless cross-border transactions and payments, and foster greater economic cooperation.”

The first test of the LCS involved the sale of 25 kg of gold from a UAE gold exporter to a buyer in India at about 128.4 million rupees ($1.54 million).

According to WIONews in India, the LCS system will reduce costs and speed up transactions between the two countries.

Additionally, reliance on national currencies is anticipated to bolster economic resilience and strengthen bilateral relations. Moreover, any surplus balances in the local currencies can be invested in various local assets, including corporate bonds, government securities, and equity markets.”

India has also purchased oil from Russia using non-dollar currencies.

India ranks as the third-largest oil importer in the world.

If the trend of dollarless transactions expands to other countries, the minimization of the dollar in the global oil trade would be bad news for the United States.

As it stands, the majority of global oil sales are priced in dollars. This ensures a constant demand for the greenback since every country needs dollars to buy oil. This helps support the US government’s “borrow and spend” policies, along with its massive deficits. As long as the world needs dollars for oil, it guarantees demand for greenbacks. That means the Federal Reserve can keep printing dollars to monetize the debt.

ZeroHedge explained how the process works.

One of the core staples of the past 40 years, and an anchor propping up the dollar’s reserve status, was a global financial system based on the petrodollar – this was a world in which oil producers would sell their product to the US (and the rest of the world) for dollars, which they would then recycle the proceeds in dollar-denominated assets and while investing in dollar-denominated markets, explicitly prop up the USD as the world reserve currency, and in the process backstop the standing of the US as the world’s undisputed financial superpower.”

Simply put, de-dollarization would drastically diminish US economic power and wreck the country’s economy.

And India isn’t the only country drifting away from the dollar.

In January, Saudi Arabia Finance Minister Mohammed Al-Jadaan said the country is open to discussing trade in currencies other than the US dollar.

“There are no issues with discussing how we settle our trade arrangements, whether it is in the US dollar, whether it is the euro, whether it is the Saudi riyal,” Al-Jadaan said in an interview with Bloomberg TV.

Al-Jadaan went on to say, “I don’t think we are waving away or ruling out any discussion that will help improve the trade around the world.”

Saudi Arabia has sold oil exclusively for dollars since 1974 under a deal with the Nixon administration. If the Saudis shift away from the dollar and sell oil in other currencies, other countries would likely follow suit due to the country’s influence on the global oil market.

While the current de-dollarization trend doesn’t directly threaten the dollar’s role as the world reserve currency — yet — it could foreshadow bigger problems down the road, especially if the trend continues to accelerate. After the Russian invasion of Ukraine, IMF Managing Director Gita Gopinath warned that sanctions on Russia could erode the dollar’s dominance by encouraging smaller trading blocs using other currencies. That’s exactly what we’re seeing.

If the demand for dollars were to plunge significantly, interest rates on US Treasury bonds would soar. This would be an untenable situation for a government servicing more than $32 trillion in debt.

While the world isn’t on the verge of jettisoning the dollar, there does seem to be an increasing likelihood the petrodollar could face competition from other currencies. This is yet another sign that the dollar may eventually lose its status as the sole reserve currency. Americans should be wary of counting on long-term dollar dominance to prop up its house of cards economy.