Shifting Sands: The Reported Saudi’s move away from the Petrodollar and its Ripple Effect on Clean Energy Transition Funding in the Global South

Interestingly, the long-standing agreement between Saudi Arabia and the US about using the US dollar as the currency for transaction in the oil market is coming to an end. Saudi Arabia as reportedly refused to renew the agreement, indicating a new era where oil and gas will be traded in different currencies such as Yuan, Euro, Rubbles, Indian Rupee amongst others. This is not an insignificant trend, but rather it is one that would change the dynamics of the global energy ecosystem as we know it. This is particularly as regards how the financial position and capacity of key global economies that are the forefront to driving the transition to clean energy would change. In this case, the funding mechanism of clean energy projects in the Global South, which significantly depends on international investment from these key economies would undergo significant changes.

It is important to note that the petrodollar economy has made the US dollar become the global reserve currency, hence a transition away from the petrodollar global economy will inundate the power of the US dollar in the global market. With this, there would be reduced demand for the dollar in the global market, increasing its volatility which can make investors become wary of it as the go-to currency for investment stability. As a result, investors may want to diversify their investments into other currencies, that are not solely dependent on the US dollar for their valuation. With this trend, the risk of currency value fluctuation becomes eliminated, thereby increasing the long-term value proposition of investing in clean energy projects in these countries in the Global South, that have been faced with long-term currency volatility issues

However, it must be understood that US and its agencies are a significant source of clean energy funding for governments within the Global South, through its different programs such as Power Africa, U.S International Development Finance Corporation, USAID Clean Energy Programs, Climate Investment Funds and other partnerships and multilateral initiatives, through which billion so dollars have flowed into the region. It can be argued that the sustained availability of funding for these programmes is tied to the low interest rates at which the US government borrows money, which is bound to change as the petrodollar oil economy fades away. In the event of higher interest rates, there would be less funding for these programmes, which are critical to catalyzing private investment in clean energy projects in the Global South. In similar manner, US-based investors would have access less capital for investments in clean energy transition projects, slowing down energy transition in the Global South.

Well, it is not all gloomy for the Global South as removing dependency on the US dollar would encourage bilateral trade between countries, which can also open up funding innovative opportunities especially for countries with aligned interests. Within this context, countries with weaker currencies that participate in equitable trade arrangements with other countries, allowing the inflow of foreign direct investments (FDIs). Nonetheless, the nature of such flow of FDIs to countries with weaker current cannot be outrightly determined due to the complexity of such trade arrangements. For instance, there remains uncertainty about the effectiveness of the Nigerian-Chinese trade arrangement where ~2.5 billion currency swap deal to provide liquidity support, as concerning its ability to facilitate significant trade and investment between the countries.

From another perspective, it is possible that with the increasing dominance of the BRICS trade alliance globally, consequently controlling about USD 28.5 trillion (~36%) of global GDP with projections from Bloomberg showing that it would increase to about 45% of global GDP by 2040, the uncertainty around such trade arrangements could be eliminated as their respective currencies could become reserve currencies. This should lead to more stable economies, which can therefore enable the success of such partnerships to drive FDIs for clean energy projects in the Global South. There is also the school of thought the idea behind BRICS is to rival US dominance in the global market, there could determined efforts to ensure that trade arrangements between this economic bloc come to fruition.

Finally, it is imperative to highlight the dynamic shift in the global market in the event of a dwindling petrodollar economy would likely reduce the commitment of investors to long-term clean energy projects in the Global South, so there remains uncertainty about the behaviour of profitability indicators of these projects such as Return on Investment, Payback Period etc. In this event, the flow and availability of funding for clean energy investments in the Global South becomes unpredictable into the near future.