The increasing power of China’s economy and its growing demand for oil could well lead to a shift from the petrodollar to the petroyuan, writes Tom Pattinson
Back in 1973, the then US president, Richard Nixon, brokered a deal with Saudi King Faisal bin Abdulaziz Al Saud. In that deal, it was agreed that all Saudi oil would be sold in US dollars, and in exchange, the USA would sell advanced weapons to Saudi Arabia. This deal cemented the US dollar as the de facto global currency following the 1944 Breton Woods meeting, in which it was agreed that global currencies would be pegged to the US dollar. The Saudi agreement was the start of the petrodollar system that has maintained the US dollar as the currency of choice for the rest of the world for the last half a century.
China, however, is throwing a spanner in the works. It doesn’t like spending US dollars and wants to use its own currency – the RMB – when buying oil. Therefore, it has traditionally avoided buying from OPEC countries, which trade in US dollars. This has made Russia the number one oil importer for China. However, China’s growing thirst for energy has seen Saudi Arabian oil make up about a quarter of its usage. Such growing reliance on Saudi oil has led to China’s state-owned oil companies Sinopec and PetroChina offer a reported $100 billion for a five percent stake in Saudi Aramco.
China is making a power play for power. It is buying into the energy market across all geographical regions and all sectors of energy production
For its part, Aramco (formerly Arabian-American Oil Company) has been looking for investment and were understood to be considering a stock market listing in a bid to raise funds. Growing demand for oil from Asia and the development of infrastructure along the Belt and Road make China a very attractive partner. China can (or will soon be able to) also offer advanced weapons, and Trump’s volatile America looks increasingly unreliable as a partner. US hedge funds looking for short term gains would currently baulk at the idea of investing in Saudi oil but China’s long term strategists recognise the value of short term economic losses in return for long term geopolitical gains.
China’s long term strategists recognise the value of short term economic losses in return for long term geopolitical gains
A direct investment from the Chinese consortium of banks, oil companies and sovereign wealth funds would mean that Aramco could shelve the planned listing on the stock market. It would also mean that South Korea, Japan, Russia and, of course, America would miss out on owning a share of the world’s largest oil producer.
But it is not just about access to cheap oil. China continues to build its reserves as it develops its own domestic oil and gas developments on the mainland and in the disputed South China Sea. It is also a world leader when it comes to new technology, green-tech and renewable energy. (LINK HERE TO http://focus.cbbc.org/focus#features/the_silk_road_paves_the_way_for_green_tech ) It is also not just buying into African and South American reserves. The $250 billion of deals that President Trump signed on his visit to Beijing last month were largely hydrocarbon sales to China. China Energy Investment Corporation plans to put $83.7 billion into shale gas development in West Virginia; and Sinopec, Bank Of China, and China Investment Corp have signed a $43 billion deal with Alaska Gasoline Development Corp. Yes, that’s right – China is buying up America’s very own hydrocarbons in its back yard.
China is making a power play for power. It is buying into the energy market across all geographical regions and all sectors of energy production. Having a stable supply of energy is a necessity for economic growth, but having control of the dominant currency is a necessity for global power.
The RMB is ready to make its move. Following its introduction to the World Bank’s special drawing rights basket in 2015, it could be that a shift from petrodollar to petroyuan is the final spurt that China needs to make the RMB the world’s preferred currency.
