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The Petrodollar Isn’t Dead Yet

Texas Oil

A number of pieces have to fall into place before the petrodollar moves into second place...

Few geoeconomic game-changers are more spectacular than yuan-denominated future crude oil contracts – especially when set up by the largest importer of crude on the planet.

And yet Beijing’s media strategy seems to have consisted in substantially play down the official launch of the petro-yuan at the Shanghai International Energy Exchange.

Still, some euphoria was in order. Brent Crude soared to $71 a barrel for the first time since 2015. West Texas Intermediate (WTI) reached the highest level in three years at $66.55 a barrel; then retreated to $65.53.

A series of petro-yuan “firsts” include the first time overseas investors are able to access a Chinese commodity market. Significantly, U.S. dollars will be accepted as deposit and for settlement. In the near future, a basket of currencies will also be accepted as deposit.

Does the launch of the petro-yuan represent the ultimate deathblow to the petrodollar – and the birth of a completely new set of rules? Not so fast. That may take years, and depends on many variables, the most important of which will be China’s capacity to bend, tweak and ultimately rule the global oil market.

As the yuan progressively reaches full consolidation in trade settlement, the petro-yuan threat to the U.S. dollar, inscribed in a complex, long-term process, will disseminate the Holy Grail: crude oil futures contracts priced in yuan fully convertible into gold.

That means China’s vast array of trade partners will be able to convert yuan into gold without having to keep funds in Chinese assets or turn them into U.S. dollars. Exporters facing the wrath of Washington, such as Russia, Iran or Venezuela, may then avoid U.S. sanctions by trading oil in yuan convertible to gold. Iran and Venezuela, for instance, would have no problems redirecting tankers to China in order to sell directly in the Chinese market – if that’s what it takes.

Related: Oil Majors Should Invest In Deepwater Drilling

How to bypass the U.S. dollar

In the short- to medium-term the petro-yuan will surely boost the appeal of the Belt and Road Initiative (BRI), especially when it comes to the House of Saud.

It’s still unclear in what capacity Beijing will be part of the Aramco IPO, but that will be a decisive step towards the fateful historic moment when Beijing will tell – or compel – Riyadh to start accepting payment for oil in yuan.

Only then the petrodollar may be at serious risk – along with the U.S. dollar as the global reserve currency.

I have stressed before how, at the 2017 BRICS summit, Russian President Vladimir Putin went no holds barred supporting the petro-yuan, specifically challenging the “unfairness” of the US dollar’s unipolar dominance.

How to bypass the U.S. dollar, as well as the petrodollar, has been discussed at BRICS summits for years now. Russia is now China’s largest crude oil supplier (1.32 million barrels a day last month, up 17.8 percent from a year earlier.) Moscow and Beijing have been forcefully bypassing the U.S. dollar in bilateral trade. In October last year, China launched a payment system in both currencies – the yuan and the ruble. And that will apply to Russian oil bought by China.

Still, the whole petrodollar edifice lies on OPEC – and the House of Saud– pricing oil in US dollars; as everyone needs greenbacks to buy oil, everyone needs to buy (spiraling) U.S. debt. Beijing is set to break the system – as long as it takes.

The petro-yuan as it stands does not provide access to Chinese oil markets. It starts as a great deal especially for Chinese companies who need to buy oil but would rather avoid the oscillations of foreign exchange. Nothing changes for the rest of the US dollar-dominated commodity planet – at least for now.

The game will really start to change when other nations realize they have found a real credible alternative to the petrodollar and switching to the yuan en masse will certainly spark a US dollar crisis.

What the petro-yuan may be able to provoke in the short term is an acceleration of the next crises in treasuries and bond markets, which will inevitably spill out in the form of a crisis in global currency markets.

That pan-Eurasian resource basket

The game-changing aspect, for now, mostly has to do with the exquisite timing. Beijing has crafted an ultra-long-term plan and yet chose to launch the petro-yuan smack in the middle of a period of sharp deterioration in trade relations with Washington.

The answer to the geoeconomic riddle is bound to be The Golden Moment. Eventually gold will rise to a level where Beijing – by then totally in control over physical gold markets – feels ready to set a conversion rate.

Related: US Oil Rig Count Dips As Prices Rise

The – Arabian – ‘petro’ side of the petrodollar equation should have been replaced long ago by a priceless, captured pan-Eurasian resource basket. That was what Dick Cheney dreamed of – centering his dreams on the energy wealth of Central Asia and Russia.

That did not happen. What we have instead is shrieking, manic Russophobia – more like a graphic indication of how precarious the position of Western banking elites is. On top of it, with the petro-yuan, China deploys the key weapon, incorporated into BRI, capable of accelerating the end of the unipolar moment.

Yet this is just the initial step in an ultra-high-stakes game. One should keep one’s eyes firmly focused on the interpolations between trade connectivity and technological breakthroughs. The petrodollar may be in danger but is far from finished.

By Zerohedge

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  • JACK MA on April 01 2018 said:
    QE killed the petrodollar already and the dollar is no longer a equal store of value when compared to gold especially when billions of more dollars must now be printed to fulfill obligations to baby boomers. Would a oil exporting nation rather have the scarcest metal on earth (GOLD) or the a dollar printed out of thin air and in abundance. It's a no brainer to go back to the historic ratio of 15 barrels of oil for 1 ounce of gold. The FEDS already killed the petro dollar itself buy printing fake fiat dollars into worthlessness. Saudi will take the Yuan and China will be the new defender of SA from any enemy. The new version of Bretton Wood. Eventually the Yuan will step out of the picture and it will be a simple and old fashion gold for oil trade with oil price stability for 50 years. No more debasing oil prices using the dollar as a proxy. IMHO
  • Mamdouh G Salameh on April 01 2018 said:
    The 26th of March 2018 will go in history as a major game changer for the United States’ economy, China’s economy and the petrodollar and also for China’s status as an economic superpower. In that day China launched its yuan-denominated crude oil futures in Shanghai thus challenging the petrodollar for dominance in the global oil market.

    However, the petrodollar is not dead by a long shot. It will still be with us years from now albeit in a diminished status. Its eventual demise will depend on three major factors: A petro-yuan fully convertible to gold, Russia, Saudi Arabia.

    A petro-yuan backed by and fully convertible to gold brings a stable confidence frame to support what may very well become “Oil for Gold” or “Petro-yuan for Gold”. That means China’s vast array of trade partners will be able to convert petro-yuan into gold without having to keep funds in Chinese assets or turn them into US dollars. Exporters facing the wrath of Washington, such as Russia, Iran or Venezuela, may then avoid US sanctions by trading oil in petro-yuan.

    But it won’t be easy to unseat the petrodollar without the participation of Russia and Saudi Arabia. Between them Saudi Arabia and Russia account for 26% of global oil production and 25% of oil exports.

    Russia is already on board. Moreover, the combination of Russia as the world’s largest crude oil producer and China as the world’s biggest oil importer enhances the strength and appeal of the petro-yuan.

    China is now trying to persuade Saudi Arabia to start accepting the petro-yuan for its crude oil. If the Chinese succeed, other OPEC oil exporters could follow suit.

    If Riyadh wants to avoid losing more ground, it may have to agree to petro-yuan sales. For Saudi Arabia, it will find itself between a rock and a hard place – lose the Chinese market or spark the ire of Washington. On balance, I think Saudi Arabia will accept the petro-yuan for oil exported to China and the Asia-Pacific countries whilst continuing to accept the petrodollar for exports to the European Union (EU) and the United States. Even such a compromise will still tip the balance in favour of the petro-yuan since 75% of Saudi oil exports go to China and the Asia-Pacific region. This has nothing to do with IPO of Saudi Aramco, since it is my considered opinion which I have been expressing for the last three months that Saudi Arabia is going to eventually withdraw the IPO altogether since it no longer needs it financially.

    The launching of the petro-yuan could be a “wake up call” for the United States. Moving oil trade out of the petrodollar into the petro-yuan could take initially between $600 billion and $1038 billion worth of transactions out of the petrodollar. Maintaining the petrodollar is America’s primary goal. Everything else is secondary.

    This is critically important, because once the dollar loses its coveted reserve status, the consequences will be dire for Americans. Any significant change in their status quo due to this issue, is bound to generate a strong response. The imposition of tariffs on Chinese goods could be the first shots in the petro-yuan/petrodollar war of attrition.

    The United States is not going to take this potential threat lying down. To delay or halt its economic decline, America could embark on military adventures possibly triggering a war in Syria, Iran or North Korea, for example.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • John Scior on April 01 2018 said:
    It seems that this "Golden moment" you speak of could bankrupt the Government of China if securities backed by gold- a limited resource - become more numerous than the available gold there is to acquire. If a situation arises and the markets then demand the gold, of which one might not be able to secure, you then are presented a situation where the price of Gold skyrockets as China attempts to purchase enough Gold to cover the transaction. One might look into the "Nixon shock" as a background story which was caused when President Nixon took the US finally off the Gold standard. Vast exponential shockwaves may force China to float its currency and thus undermine its ability to artificially subsidize its export powerhouse and in essence its economy.

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