China Takes Steps to Buy Oil in Yuan
by John Lawrence
Forget the trade war - the tit for tat tariffs. The really big news is not being reported, and that is that China soon will buy oil with their own currency , not the American dollar. Oil is the world's most traded commodity, with an annual trade value of around $14 trillion, roughly equivalent to China's gross domestic product last year. The dollar's stranglehold on world trade comes about as a result of the deal that President Nixon made with Saudi Arabia and OPEC that they would only sell oil in dollars. This elevated the dollar to the world's reserve currency.
In return the Saudis got a military alliance with the US to defend its interests in the Middle East. Their friends became our friends, and their enemies became our enemies. So the alliance with Saudi Arabia had nothing to do with the superiority of the Saudi position on human rights or its ethical position in the Middle East. And in fact that deal would come back to bite the US when the Saudi products of Wahhabism, their state religion, namely Osama bin Laden and ISIS ended up biting the US in the ass. 15 of 19 of the 9/11 hijackers were Saudis. So the alliance between US and the Saudis was put at risk by the Saudis themselves since Wahhabism encourages hatred of the West. The US deal with Saudi Arabia turned out to be a deal with the devil, so to speak.
Now along comes China and says no, we're going to force the situation and demand, as the world's largest importer of oil, that Saudi Arabia take yuan as payment for oil, not dollars. Naturally, there are many other countries, namely Russia and Iran, that would like to see this happen as US sanctions on these countries are enforced by means of the US dollar's status as the world's reserve currency. In addition to the motivation of doing an end run around US sanctions, there are additional reasons for ending the domination of the petrodollar like the extremely low interest rate on US Treasury bonds where the Saudis, Russians and other oil exporting countries park their petrodollar profits.
When other nations don't feel the necessity of trading oil in dollars, the US will lose its ability to run huge budget deficits since the sale of US Treasury bonds to China and other countries will cease to exist. When this happens, the US will find itself in the position of either reining in its deficits or continuing to print fiat money to finance them. Either situation will force some big changes in the world situation. The US will lose its stranglehold on the sale of oil and will lose the position of the dollar as the world's reserve currency. The dollar will lose value with respect to other currencies, and the US will lose its ability to impose sanctions. The alliance with Saudi Arabia will become strained. That is why the Saudi's new leader, Mohammed bin Salman, is conducting a charm offensive in the US. The Saudis don't want to lose their alliance with the US which supplies them with all sorts of weapons systems with which they have ravaged the poor Yemenis. He is saying as much as "We are the good guys. They (our enemies, mainly Iran] are the bad guys." Don't you guys in the US forget it.
Foreignpolicy.com reports:
Sometime soon, after the close of the Chinese New Year, officials in Shanghai will flip the switch and start trading in an arcane new financial product — one that could presage a huge shift in global energy markets and advance China’s quest to play a bigger role in the global economy.
After years of false starts, a long-awaited Chinese oil futures contract will make its debut on the Shanghai Futures Exchange, likely in late March [2018!]. It will be the first crude oil benchmark in Asia, which is important because that’s where oil consumption is growing the most. And it will be the first contract priced in Chinese currency, known as the renminbi or yuan. Currently, the main global benchmarks for crude oil are in New York and London — and priced in dollars.
So why should Russia which is suffering under US sanctions, be forced to sell oil to China in US dollars? Doesn't make much sense from their perspective. Meanwhile, the US is oblivious to the coming collapse of the US dollar as the world's reserve currency. More and more transactions will be undertaken with China's yuan starting like ... right now (gasp). Could it be that the US' long run as the world's hegemon is about to come to an end?
