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China Fires Shot Across Petrodollar Bow: Shanghai Futures Exchange May Price Crude Oil Futures In Yuan
With the US shale revolution set to make America the largest exporter of crude, however briefly, the influence of Saudi oil is rapidly declining. This has been felt most recently in the cold shoulder the US gave Saudi Arabia and Qatar first over the Syrian debacle, and subsequently in its overtures to break the ice with Iran over the stern objections of Israel and the Saudi lobby (for a good example of this the most recent soundbites by Prince bin Talal ). But despite the shifting commodity winds and the superficial political jawboning, the reality is that nothing threatens the US dollar's hegemony in what many claim is the biggest pillar of the currency's reserve status - the petrodollar, which literally makes the USD the only currency in which energy-strapped countries can transact in to purchase energy. This may be changing soon following news that the Shanghai Futures Exchange could price its crude oil futures contract in yuan, its chairman said on Thursday, adding that the bourse is speeding up preparatory work to secure regulatory approvals.
In doing so China is effectively lobbing the first shot across the bow of the Petrodollar system, and more importantly, the key support of the USD in the international arena.
This would be in keeping with China's strategy to import about 100 tons of gross gold each and every month, in addition to however much gold it produces internally, in what many have also seen as a preparation for a gold-backed currency, which however would require a far broader acceptance of the renminbi in the international arena and most importantly, its intermediation in a crude pricing loop. It is precisely the latter that China is starting to focus on.
China, which overtook the United States as the world's top oil importer in September, hopes the contract will become a benchmark in Asia and has said it would allow foreign investors to trade in the contract without setting up a local subsidiary.
"China is the only country in the world that is a major crude producer, consumer and a big importer. It has all the necessary conditions to establish a successful crude oil futures contract," Yang Maijun, SHFE chairman, said at an industry conference.
Yang's presentation slides at the conference stated that the draft proposal is for the contract to be denominated in yuan and use the type of medium sour crude that China most commonly imports.
It is hardly panic time yet: Reuters adds that industry participants with direct knowledge of the plan have said the contract would be priced in the yuan, otherwise known as the Renminbi, and the U.S. dollar. However, one can argue that the CNY-pricing is for now a test to gauge acceptance of the Chinese currency, and will take on increasingly more prominence as more and more countries, first in Asia and then everywhere else, opt for the CNY-denomination and in the process boost the Renminbi to ever greater parity with the USD.
Here are the punchlines:
"The yuan has become more international and more recognised by the financial market," Chen Bo, Chinese trading firm Unipec's executive general manager, told Reuters.
"I don't think it would be unacceptable for the world to use the renminbi for commodities trading."
Certainly not, although it would also entail a depegging the CNY from the USD, something which China is for now unable and unwilling to do. Because once the Yuan is freely priced, kiss all those Wal-Mart "99 cent" deals goodbye.
Which in retrospect may be just what the US wants: a very gradual and controlled dephasing of the USD's reserve currency status. Recall that what the Fed wants at any cost is inflation which has so far failed to materialize at the level demanded by the Chair(wo)man thanks in part to cheap Chinese goods and ongoing US exporting of inflation to China. So if that means a spike in the prices of China imports - so key to keeping US inflation in check - so be it. Because we can already see the Fed's thinking on the matter - certainly it will be able to always restore the USD's supreme status in "15 minutes" or less when it so chooses.
Of course, by then China, and the Petroyuan, may have a very different view on the world.
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he is pro bailout fuck'um
The US will never, no matter how briefly, be "the largest exporter of oil" as indicated in the opening sentence.
"Producer" perhaps, but only if you count NGL and biofuels and such as 'crude' oil, which they are not.
As always, basic, basic mistakes abound in energy reporting.
Correct, and if they get such simple things wrong, why would you believe that they understand the subtleties of the "petrodollar" any better...
The good news: A petrodollar in a PeakOil (decreasing supply) scenario can only appreciate in value.
Bad news: The Saudis are so pissed at being sidelined in the Syrian crisis, there is no teling what they will do, PD-wise. The best evidence of this is that their best ally now is Israel.
Good news: The US is now the world's largest oil producer (not exporter, as the article said), so why do we care what the Saudis do?
Bad news: We should care because domestic production reduces the amt of oil the US imports, thus reducing the advantages gained by exporter nations to trade in dollars. At the very least, a competing bourse in renminbi or other currency would allow for arbitrage on a scale never seen before. The only loser is the dollar.
The good news: Another oil trading currency would allow for more accurate price-finding. My guess is that this will cause the price of oil to go up... I suspect that the petro-dollar has artificially depressed the price of oil. I say this only because the general tendency of monopolies is to create a maximum buy low/sell high dynamic. Oil is an input resource, thus the dolloar monopoly has kept the price of it down.
Bad news: See above- high price causes economic slowdown, raising the specter of deflation in a debt-based economy.
Good news: The Chinese would be mad to create a gold-backed currency. Or, if they should (ever) declare the yuan to be gold-backed, my guess is that it would in effect float against gold. In prectical terms, that would mean that you get less gold in (theoretical) exchange for banknotes every single day, until the amt of gold you could receive for a note would be infintesimal, a theoretical quantity, say "37 atoms" or some other ridiculous number. But I digress. The Chinese would be mad to create a gold-backed currency because to do so would limit their ability to QE if they wanted/needed to. Uncontrollable deflation is a large-displacement V8 engine block no-one wants to tie around their neck. This kind of deflation causes hungry people to start a) sucking up revolutionary ideology, and b) start shooting people.
Bad news: I know all of you gold-bugs would love for China to create a gold-backed currency, but dream on as the price of your gold gets steadily hammered by the conspirations of the financial elite day after day after day. Not only is the threat of deflation ever-present, but when the Int'l Bankers play the fiddle, all the Chinese can do (like the rest of us) is dance to their tune. The Rothschilds may allow the Chinese to accumulate a certain percentage of gold, but my guess is that the Chinese will never acquire an ounce beyond that number. If any of you think the Chinese make fiscal/economic policy independent of the International Banking Cartel, it is now time to stop counting your coin collection, climb out of your apocalypse bunker and take a look around.
Explain why the dollar rises as a result of peak oil...
You also state that oil is underpriced as a result of the petro-dollar...
How do you reconcile these statements?
You are correct in that China would be insane to go to a gold-back yuan...
Esp. given that they are the largest oil importer now...
----
Finally, when the US starts to produce > 9 mmbpd of C+C then they might be called the largest oil producer... NGPLs, refinery gains and bio-fuels aint' oil....
OK... this is by the seat of my pants...so I could be wrong.
Theoretically, the value of the currency reflects the value of the underlying asset (what it's backed by).
If gold has an intrinsic value that never changes, then by theory, the value of the currency that uses gold as a backing never changes, ie no inflation or deflation.
So, using this logic, if the USD is essentially backed by oil (petrodollar), and the value of oil goes up in a supply-squeeze scenario (peak oil), then the dollar gains value as well (strengthens). In petro-dollar hegemony, this could have all sorts of deleterious effects on the economy. Competition between petro-currencies may actually be a good thing.
Of course, the USD is not really a petro-dollar. Oil may partially back the USD in a de-facto sense, but what really backs the USD is the productive capacity of the US economy, ie, the ability of the people of the US to pay their debts. Even if a law was passed making oil the official backing of the dollar, debt service would remain the real backing, and peak oil will DESTROY the ability of the US to pay back its debt. A continuation of petro-dollar status, by strengthening the dollar could actually hasten the destruction of the US economy and the dollar with it, in perfect irony.
Maybe this is why the PTB are allowing a Chinese bourse????
Oh, sorry I didn't reconcile!
OK...I said that petrodollar status kept the price of oil artificailly low, and at the same time I said that a petrodollar would strengthen in a peak oil scenario.
I guess there are two competing forces at work. On the one hand, competition allows for more accurate price discovery. for example, bitcoin was higher in China than the US... great arbitrage there, and all this allows the price of bitcoin to be more accurately discovered. So, if a barrel of oil sells in USD for 100, and in yuan at essentially 110, this allows for the price of oil to be more accurately discovered.
But why would dollar monopoly(petrodollar) create an artificial price suppression of oil? Hmmm, I am really trying to think here, no snark...
OK, what about this? Demand side liberation! Right now, the Chinese have to come up with dollars to buy oil. if they cannot have an unlimited supply of dollarsm, they cannot pay unlimited prices for oil, thus, the demand side of oil is constrained. Once they can pay yuan, which they can print as much of as they want (no gold backed yuan folks!), they can pay more for oil, thus driving the price higher.
I hope that's not too weak of an argument.
So, to reconcile: Peak oil,which is a supply-side squeeze, (even with a petrodollar and the concomitant price suppression that goes with it) will cause a steady increase in the value of oil, thus strengthening a petro-dollar.
However, if there are competing oil currencies, the oil price will go up as demand pressures are no longer contained by the relative scarcity of the reigning petro-currency (USD). This may actually weaken the USD.
But if the Chinese persist in pegging the yuan to the dollar, I suppose it is all a wash, and the USD remains the king, as a yuan is just a dollar with a chinese person on it instead of an american. You go figure. i have to go and produce something now.
Couple of points:
The value of gold is determined by the amount of labor and energy required to produce it... Yes, it is abstract vague definition, but its validity is reflected in the fairly tight ratio of gold to oil prices historically...
What will herald the demise of the dollar will be a majority of oil exporters accepting alternate forms of payment. The fall of the House of Saud could precipiate this....
There is also the limit where net oil exports, currently ~40 mmbpd, become de minimus making the holding of petrodollars a dubious proposition...
Another asymptote is the point where foreign holders of USD denominated debt generate enough coupon to pay for the available oil on the market....
These last two scenarios are clearly boundary conditions and are likely not realistically play out. It is is noteworthy, that the USD "created" by paying the coupon of China and Japan USD holdings were sufficient to purchase ~12-15 % of freely traded oil...
Note the QE does not increase the amount of dollars for such purchases (aside from 0.25% earned on excess reserves)...
Before getting too excited about this new Chinese bourse, does it involve contracts for physical delivery? Or is is cash settlement? And given that the tight trading band imposed on the CNY-USD, it is still de facto dollar denominated contracts...
sure - setting up the system is insignificant - creating the market is what counts.
yes, let's trade communist denominated oil - where do I sign up????
Yes. You prefer fascist denominated oil?
This just enlarges the pool of yuan held in private hands and makes more private wealth available for the Chinese Communist Party to embezzle via currency dilution. This is not a complain, just a statement of facts. The US central bank has been doing this for 100 years.
This is the very reason that being a reserve currency is so important. It is far more important to government than to its citizens.
Infinite money enables infinite government.
China could pull the plug on the fiat USA anytime it wants... not without repercussions though.
The US and Europe created the Chinese monster.
The monster will consume the US and Europe. Instead of the US Federal Reserve dictating policy it will be Asia.
Days of the US Federal Reserve in control are numbered.
Although the author claims this is a shot across our bow, I think it is more of a whisper. Until China unpegs its currency the contracts are still in dollars. Now if backed with a physical asset then we are talkig a whole different ballgame. But this is just one shit paper substitute for another.
I do think the reserve status is closing on the USA as the world is sick of our money games. How it will end no one knows, but I imagine this time a nuke or two will settle it all before the greenback loses its reserve status involuntarily.
Just wait until they start accepting Bitcoin for oil.
Ooh, I can feel the junks.
Shit, I better spend what little i have then.
Turn loose the dogs of war
How dare they, that's the world's reserve currency we're talking about. We'd better spread some "democracy" over there and fast. Heck, all the BRIC nations could use a little more "democracy".
Libya, Iraq, Iran - and now China.
Go on, Team America, try hitting that one with drones & "Shock and Awe"
see how far that gets ya.
In the first paragraph it is asserted that that the petrodollar is under no imaginable threat. It then proceeds to explain how the yuan is gaining ground. Which is it? Further on, the author mentions a future parity of the yuan with the dollar. I assume that he is referring to use of the currency and not its value. Going from 6.08 to 1.00 is a very long haul indeed, to be expected only under a total US dollar collapse.
Back in the late 50s, the US became a net importer of petroleum. Net imports have increased steadily ever since. Although imports have tapered off slightly in the last few years (helped by recession), we are still a long ways from being a net exporter. It would take a dozen Bakkens and turmoil in the Middle East for that to happen.