The World's New Reserve Currency? Everything You Need To Know About PetroYuan

Tyler Durden's picture

Earlier this week, we pointed out that the 'PetroYuan' is on the verge of becoming reality with Graticule's Adam Levinson noting that the birth of a yuan-denominated oil contract will be a “huge story” in the fourth quarter, and will be a “wake up call” for investors who haven’t paid attention to the plans.

As a reminder, nothing lasts forever...

Judging by the interest in the topic, investors are less informed than many believed and so the different teams within Société Générale Cross Asset Research examine what this contract would mean for the global oil markets and for the internationalisation of the yuan - if it gets off the ground.

 

Part 1 The proposed yuan-denominated crude oil futures contract

  • Why is a yuan-denominated Chinese crude futures contract interesting to think about?  Why is it potentially significant?
  • Would yuan-denominated Chinese crude futures affect the physical markets?
  • Has China actually proposed changing its crude buying from USD to yuan?
  • What about the crude producers and exporters?
  • How much non-USD crude trade currently exists?
  • If small volumes don’t change how the oil market operates, how big would the volumes have to be to make a difference?
  • Is there another commodity that trades in multiple currencies at different exchanges that we can learn lessons from?

Part 2 Another step towards currency internationalisation?

  • Why does China want to introduce a yuan-denominated crude oil futures contract? 
  • How can the yuan succeed in becoming a reserve currency?
  • What does the status of an international currency mean for the yuan?
  • What will an internationalised yuan mean to China’s FX reserves?

*  *  *

Part 1: The proposed yuan-denominated crude oil futures contract

In November 2013, the Shanghai International Energy Exchange (INE) was established. Fully owned by the Shanghai Futures Exchange, the INE began efforts to offer an alternative crude oil futures contract to the global oil markets. After four years, these efforts are continuing. The proposed contract is for medium sour crude oil, is physically deliverable, and – most significantly – would be denominated in yuan.

We begin with the oil markets.

Why is a yuan-denominated Chinese crude futures contract interesting to think about? Why is it potentially significant?

Such a contract would be a tool that would make it possible for crude exporters selling to Chinese refiners to hedge their sales in yuan. This could help any future effort by China to import crude using yuan; on the other side of the coin, it could also help any future effort by various crude exporters to sell crude in a currency other than USD. 

In the abstract, the potential volumes are large, which is why this is worth thinking about.  China is the world’s biggest crude importer, with net imports in January-July 2017 of 8.4 Mb/d (and trending higher); the second biggest crude importer is the US, with net imports of 7.2 Mb/d in January-July 2017 (and trending lower). 

To put this into context, according to the IEA, in 4Q17, global product demand will be 98.5 Mb/d and global crude demand will be 82.2 Mb/d (including refinery runs and direct burn).  Crude trade is much less, at 42.4 Mb/d in 2016, according to the BP Statistical Review; this excludes crude that is produced and consumed in the same country. In other words, Chinese net crude imports account for over 10% of the global crude market and almost 20% of global crude trade. 

Would yuan-denominated Chinese crude futures affect the physical markets?

No, not at all. That’s not what this is about – there would be no impact on physical supply (like the example of natural gas – see below). In theory, if this were to happen, it would purely be about pricing. The global oil markets are denominated almost entirely in USD, so it is interesting to think about that landscape changing.

Has China actually proposed changing its crude buying from USD to yuan?

No. In recent years, there has been occasional general talk from China of moving away from the USD for purchases of crude oil and other commodities; however, we are not aware of any serious or concrete proposal on the table to start buying crude in yuan any time soon. That said, it is worth acknowledging that most Chinese crude buying is done by three large stateowned oil companies. Therefore, if it so chooses, the Chinese government certainly has the ability to push such an agenda; similarly, the government has the ability to push the use of INE crude futures for hedging crude in yuan.

What about the crude producers and exporters?

This is an important question to ask because it’s not just about what the Chinese want. As with any commercial transaction, both the buyer and the seller need to agree. In the case of crude oil, they need to agree on the volume, price, type and quality of crude as well as the delivery date and delivery location, among other things. However, the currency is almost always the USD – that is not a point of negotiation.

Over the years, including 2017, major crude producers such as Iran, Russia and Venezuela have talked about selling and exporting crude in non-dollar currencies. The reasons have been general geopolitical tensions with the US and Europe, and more specifically, oil-related sanctions; the use of non-dollar currencies may offer a way to circumvent oil-related sanctions, at least partially.  

Hypothetically, if China were to have serious talks with Iran, Russia and Venezuela about importing crude and paying in yuan, that would be important because it would add another dimension to the geopolitical analysis. If sanctioned countries could simply side-step the measures by selling crude in yuan or other non-dollar currencies, it would mean that the risk of supply disruptions and potential upside risk for oil prices would be reduced.

How much non-USD crude trade currently exists?

It is very difficult to make an accurate and confident estimate. Again, depending on the political context, talk of non-dollar crude trade from the countries mentioned above comes and goes, and sometimes some deals are done more for political and public relations purposes than for anything else. 

Our “guesstimate” is that such volumes probably amount to no more than 300-350 kb/d out of the 82.2 Mb/d global crude market noted above. For reference, to put that in terms of physical crude trade, 5 VLCC-size tankers each month carrying 2 Mb each would equal 333 kb/d. We would consider that, or its equivalent in smaller vessels, to be a generous estimate. We would consider 10 VLCCs or equivalent each month, or 666 kb/d, to be an extreme upside estimate but highly unlikely. This excludes barter arrangements and loans-for-crude deals. China lent Russia large sums of money after the global financial crisis in 2008-2009 in exchange for longterm crude supply deals; more recently, China had such an arrangement with Venezuela.

The bottom line, in our view, is that actual crude trade paid in cash but not using USD has never amounted to more than a few token cargoes. Importantly, when this does happen, the entire transaction and negotiation of the price is done in USD as usual, with pricing done the normal way; for example, both Urals and Dubai, which are key marker crudes in their own right, are priced as differentials to Brent. The only difference when a non-USD currency is used is that a last step is added, where the amount for the invoice is converted from USD into a different currency.

If small volumes don’t change how the oil market operates, how big would the volumes have to be to make a difference?

The question is really: what is the tipping point? How much non-USD crude trade does there need to be for the entire negotiation to take place in yuan, or rubles, or euros?  In other words, what does it take for price discovery and price formation to take place not in USD but in another currency?

The short answer is that we don’t know. But something on the order of 7-8 Mb/d of crude trade seems to be a sensitive level from a practical standpoint. How do we come up with this?  It’s simple: we are thinking about Saudi Arabia. Saudi crude exports have averaged 7 Mb/d through the first eight months of this year; in 2016, before the current OPEC cuts took effect, they averaged 7.6 Mb/d. The 7-8 Mb/d range works out to 16-19% of the 42.4 Mb/d global traded crude volumes.

Our view is that physical efforts to shift global crude trade away from US dollars seem doomed to failure unless the Saudis fully participate. Usually in matters of pricing, the other Middle East exporters follow the lead of the Saudis, so there is a “double whammy” effect and the volumes could start to increase quickly.

In this context, the warming relationship between Saudi Arabia and Russia becomes more interesting, too. Could the two countries cooperate on this in the same way they’ve cooperated on cutting production this year, in order to stabilise prices? Perhaps. That would add even more volumes because Russia is the second-biggest crude exporter in the world.  According to the BP Statistical Review, Russian crude exports averaged 5.5 Mb/d in 2016.

However, the geopolitics of oil quickly gets complicated. Why would the Saudis want to do something (like encourage non-USD crude trade) that would benefit Iran? This is always true, but is even more true now at a time when US-Iran tensions are ramping up and the US is threatening to re-impose oil sanctions on Iran. Also, why would the Saudis want to do something that would diminish the value of their currency, which is pegged to the USD, their huge USD reserves, and other USD-denominated assets?

If it would take the Saudis to make a real fundamental change in moving the oil markets away from a sole reliance on the USD to a multiple currency market, from a Saudi perspective, the arguments “against” are at least as strong as the arguments “in favour”. In short, we are sceptical of Saudi support for such a move.

Rather than support from Saudi Arabia or a cooperative effort between Saudi Arabia and Russia, a more realistic and higher-probability scenario would be a move to non-USD crude exports led by Russia on its own or perhaps a cooperative effort between Russia and Iran – with China being the key crude buyer, using yuan, in all the scenarios. Without the inclusion of Saudi Arabia and other Middle East exporters such as the UAE, Kuwait and Iraq, the volumes involved with Russia and Iran would be much less; this would make a fundamental change in oil price formation away from USD slower and more difficult but not impossible.

Is there another commodity that trades in multiple currencies at different exchanges that we can learn lessons from?

The answer to this question is yes and the best example is natural gas. The point of making this comparison is that ultimately different denominated prices in the same underlying commodity do not affect the physical balances but do influence trade flows, arbitrage and market analysis.

The US natural gas market is the largest regional market in the world (IEA estimates it alone represented 21% of total global gas demand) and is almost entirely priced in USD (AECO, Canada’s most liquid supply point, prices in CAD/GJ). The US LNG market (imports and exports) are also denominated in USD.

The global LNG market is heavily indexed to USD as well, but that is due to the dominance of oil indexation in long-term LNG sales agreements; the USD dominance of the global LNG market thus reflects the dominance of USD in oil prices.

In Europe (which represents 13% of total global gas demand according to IEA estimates), there are two main natural gas price points. In the UK, the National Balancing Point (NBP) – the hub of UK gas trading – is denominated in GB pounds and pence/therm. In the Netherlands, the hub of natural gas trading is known as Title Transfer Facility (TTF), and this contract is in euros and euro cents per MWh. Recently, there has been an observed shift in the dominance of these price points regionally; critically, this is a function of the physical characteristics of the market rather than the currency used or the exchange rate.

Historically, NBP was the most liquid point and also the price structure included in European LNG sales contracts, making it the dominant global representation of the European market. Recently, however, TTF has seen an increase in liquidity (increased open interest) and has become increasingly reflective of the physical continental European market. Factors such as the higher carbon price in the UK, which has an impact on gas competitiveness/pricing within the regional power generation stack, the declining trend of the UK production profile, and the region’s increased dependence (seasonal switching) on the Interconnector pipeline between the UK and continental Europe have all contributed to the reduced ability of NBP to reflect the wider European market; hence the rise of TTF. Importantly, it is the changes in the physical market that have changed the competitive landscape among TTF and NBP, and it has little to nothing to do with the different exchange rates (although Brexit may have decreased NBP’s popularity).

The existence of varying price structures in the global natural gas market is a critical comparison to make for oil, which has the potential to see a rise in pricing in currencies other than the USD. It is important to emphasise that even with multiple price structures, global natural gas trading behaviour is dominated by physical market conditions. At the same time, there is sometimes an influence from fluctuations in exchange rates, making analysis of flows, arbitrage, and trading somewhat more complicated; however, supply and demand dynamics are not fundamentally affected.

Part 2: Another step towards currency internationalisation? 

Why does China want to introduce a yuan-denominated crude oil futures contract? 

The Chinese government wants the yuan to become an international currency. This means that it wants the yuan to be used widely in international transactions (a settlement currency), to be adopted as a pricing currency for goods and services in global markets (an invoicing currency), and to be considered as a store of value by international investors (an investing currency). The goal of internationalisation also goes hand in hand with the profile objective for the yuan to obtain a reserve currency status since these two are highly correlated. While it is currently unclear (or too early to discern) whether China is aiming for the yuan to become the reserve currency – dethroning the dollar – Chinese policymakers are certainly eyeing the yuan as one of the major reserve currencies.

China has been working much harder on this project since 2009. The process has moved at varying speeds depending on capital account pressures, domestic asset prices and growth considerations, but much progress has been made (see the timeline on the next page). A quarter of China’s exports and imports are settled in yuan, although most of them are still invoiced in other hard currencies.

The proposed yuan-denominated crude oil futures contract to be listed on the Shanghai International Energy Exchange (INE), fully owned by the Shanghai Futures Exchange, is another step on the road to promote internationalisation and erode the USD hegemony in the global financial system. While over the years, there have been some relatively small volumes of oil traded in non-USD currencies, including the yuan (as discussed in the oil section above), the value of oil is still priced in dollars. One of the main impacts of the proposed new crude futures contract, and presumably one of the intentions behind the proposal, is that by providing a yuandenominated financial hedging tool for crude oil, this will likely help to promote the appeal of the yuan as a pricing currency in global oil trade.

From the Chinese policymakers’ perspective, China should arguably have a bigger say in the pricing of commodities since it has become the biggest consumer of many of them. Also, the petro-dollar system seems to be a successful model to imitate: first, the yuan would be more widely accepted by natural resource exporters, and in turn, these exporters could invest their yuan revenues (as FX reserves) into yuan-denominated financial assets.

How can the yuan succeed in becoming a reserve currency?

To improve the yuan’s chances of becoming an international and reserve currency, the main areas of development would be strengthening the institutional framework, fully opening the capital account to foreign residents, allowing market forces to play a greater role and establishing and managing a policy framework that alleviates the risk of crisis over an extended period.

China technically joined the reserve currency club when the IMF added it to the SDR basket in September 2016. The narrow definition of a reserve currency is for currencies used for international trade and willing to be held by other central banks as part of their reserves. On these narrow criteria, China has achieved what few currencies have been able to do.

Realising “true” reserve status and supplanting or even meaningfully competing with the USD in the global financial system is a very high hurdle that will take time (maybe 10-20 years) and require further enhancements in various areas. A broader set of criterion (listed below) of a reserve currency highlights the enormous challenges that China faces:

Medium of exchange. Entities outside China would need to widely adopt the RMB for transactional purposes (i.e. trade settlement). The yuan trade/investment settlement, the offshore yuan market and the Belt & Road Initiative (BRI) would need to be promoted. China is making steady strides in this area, with now 25% of China’s cross-border transactions settled by yuan. According to the SWIFT, however, the yuan share in international payments has not been able to advance and has hovered around 2% since late 2014.

 

Store of value. Individuals, companies and central banks would need to have faith in the currency as able to preserve wealth. About 60 central banks now hold some RMB assets in their portfolios, but this amount only represented 1% of total global reserves at the end of 2016.

 

Liquidity and market access. To become widely accepted, a currency would need to have high liquidity with foreigners having unencumbered access to local financial markets. China has created numerous schemes for global investors to access its equity and bond markets, but it is only a start, with foreign investors’ share in onshore capital markets at merely 2%. Further liberalising the capital account for foreign residents would be a necessary condition.

 

Institutional framework. Ultimately, confidence in the legal, regulatory and policy framework would need to be paramount for foreigners to hold large quantities of the currency. The current (USD) and previous (GBP) dominant global reserve currencies already had these qualities before attaining their status.

In many ways, China is working in reverse order – pushing internationalisation before the others condition are in place. Critically, policy priorities would need to be reoriented. It will be a challenge for China to meaningfully challenge the USD’s dominance, but it is not insurmountable over the next 10-20 years provided China takes steps in opening up (full capital account convertibility), giving up control of markets and strengthening and improving transparency in its legal, regulatory and policymaking framework.

What does the status of an international currency mean for the yuan?

Before the reserve currency status can support the yuan, the yuan may have to continuously prove itself as a stable currency to boost its status as a reserve currency. We think that the fundamental factors of economic growth, debt risk and interest rate differentials will continue to play dominant roles in the yuan’s FX trends over the medium term.  
A quick check of the history of the four major currencies – the dollar, euro, yen and sterling – since the 2000s suggests a visible and positive correlation between a currency’s traded weighted performance and its share in global FX reserves. However, correlation does not necessarily mean causality, and the causality can go both ways.

For instance, in the case of the yen and sterling, however, changes in their valuations look to have led their changing popularity among global reserve managers. The strength of the yen between 2009 and 2013 did not attract significantly more reserve inflows right away, probably because of the lacklustre economic development at the time. Sterling only started to gain a share in global reserves in 2003 despite its persistent strength since late 1990s.

For the yuan, we observe that the pace of yuan internationalisation was faster during the phase of currency appreciation or stability and slower when the yuan depreciated. This came despite the continuous policy efforts.

For the past seven years, USD/CNY has moved surprisingly closely with US-China yield differentials, and in the past three years the correlation of CNY to broad dollar moves has increased. Contrary to popular belief, the CNY shows few idiosyncratic tendencies and rather behaves in a similar manner to other EM/G10 currencies.

No matter what happens, the correlation between the CNY and the USD could remain high. The simple fact is that the correlation across most currencies is high over the cycle given that many top-down macro factors tend to drive FX over the medium term. 

The CNY may, however, play an increasing role in leading currency cycles, just as the USD does now. This would mean an increasing importance of Chinese data, monetary and fiscal policy in affecting global currency trends.

What will an internationalised yuan mean to China’s FX reserves?

The project of yuan internationalisation comprises currency liberalisation, capital account open-up and domestic capital market deepening. Liberalising the currency implies that the central bank will intervene less and less in the currency market, and a relatively stable level of FX reserves is therefore most consistent with the goal of making the yuan an international currency. 

Indeed, Chinese policymakers have repeatedly expressed their commitment to making the yuan a more flexible currency, freer from direct currency interventions by the central bank. However, it is also a stated goal for the yuan to maintain relatively stability against a basket of China’s major trade partners’ currencies. These two goals are only compatible when there is no major depreciation (or appreciation) pressure on the yuan resulting from major outflow (or inflow) pressure. 

China’s FX reserves can recover this year after the $1tn drop over the previous 2.5 years because the yuan has managed to stabilise against the dollar and a basket of currencies. The yuan’s stability should be a function of 1) dollar weakness, 2) capital controls and 3) China’s stable growth this year. These three factors will likely be the main drivers of the trend in China’s FX reserves over the next few years. While there remains much uncertainty around the dollar, it seems that Chinese policymakers have honed the skill of capital controls. This ought to reduce the risk of sharp declines in FX reserves going forward.

In the meantime, we think the chance of China persistently increasing its FX reserves is also limited unless the weak dollar trend continues and accelerates. The relationship with the US is one factor, and domestically there will likely remain strong demand from Chinese households and corporates for investment diversification if China continues to rely on rapid debt growth and money creation to sustain its economic model (see Anatomy of China's outflows). As the developments in 2015 and 2016 proved, such capital outflow pressure could outweigh the support from a decent current account surplus for the yuan.

What will the yuan’s internationalisation mean to global FX reserves?

China’s share of global reserve portfolios should increase over time. Depending on whether it achieves true reserve currency status in the eyes of foreign participants, that share will be either low (5%), high (25%) or very high (25%+). 

Emerging market central banks still need a significant amount of dollars to undertake intervention assuming their currency regimes are not fully flexible, and a precautionary stockpile is desired to manage balance of payments shocks. Against all EM currencies, except most notably the CEE euro bloc, the dollar is by far the most widely traded and liquid FX cross. Virtually all intervention is done in USD crosses, and one prerequisite for central banks to shift their anchor currency to the RMB would be CNY crosses that are tradable without underlying dollar transactions being required. For instance, while EUR/CNY is quoted and traded onshore through the CFETS, it requires dealers to facilitate the trade through two separate transactions (USD/CNY and EUR/USD). The sheer size of the Chinese economy, growing global financial linkages and increasing RMB trade settlement will see a shift in this direction over time, but it will be a very long and slow process. Products such as the proposed yuan-denominated crude oil futures contract will help to marginally speed up the progression. 

Reserves can be divided into two broad categories: precautionary and excess. The precautionary portion needs to be in liquid assets to meet demand for foreign currency/dollars on short notice and mitigate balance of payments stress. Currently, these are mostly held in US government bonds or deposits, followed by European bonds, then UK, Japan, Canada and Australia down the list. China is below these. Gold is liquid but somewhat lower on the scale compared to deposits or government bonds, so there are natural limitations to how much central banks would hold. 

The excess portion of reserves can be invested in anything, and central banks have an excess globally. Central banks have undertaken various diversification efforts over the past few decades, with the share of euros in global reserve portfolios for example having increased from 20% in 2002 to 27% in 2008 before falling back to 20% in 2016. Central banks have been more active in holding commodity currencies (CAD and AUD) over the past five years.  
Russia has been buying a lot of gold. To do this, it either sells existing USD or other currency holdings, or when it intervenes and accumulates dollars it then diverts the currency to gold instead of treasuries. If central banks have excess reserves or do not want to accumulate more dollars, they could hold gold instead. 

The proposed yuan-denominated crude oil futures contract reduces the need to use dollars for the transaction, but it does not change the outcome or address the fundamental question: do central banks want/need USD or yuan? They could have bought yuan previously. The proposed yuan-denominated crude oil futures contract does not make it an easier process. But for those countries subject to sanctions, it might be attractive. According to the 4Q16 IMF COFER report (link), foreign central banks held USD85bn in allocated reserves in the CNY (or 1% of global reserves). Total foreign holdings of Chinese bonds amounted to USD135bn, according to ChinaBond, suggesting the vast majority of holdings are from central banks.

If reserve manager allocations to the RMB doubled over the next five years, and if those inflows were spread out evenly over the period, they would amount to roughly USD6bn per quarter (or another USD100bn). While not insignificant, that is still a drop in the ocean compared to other balance of payments components. However, if reserve manager allocations reached the weighting of the JPY in allocated global reserves (4%), the inflows could be closer to USD500bn over five years. An allocation equivalent to the euro (around 20% of global) reserves could see nearly USD1.5trn in inflows.

It could be challenging for the CNY to reach a high weight if global reserves are not rising. In 2002-2008, when central banks were diversifying into euros, global FX reserves were rising sharply and a significant portion of the growth in reserves was due to China. During this period, central banks were buying dollars through intervention (in an attempt to keep their currencies weaker than otherwise) and with some of those newly acquired dollars they decided to diversify their holdings and buy euros. However, in the absence of a strong increase in global FX reserves going forward, it would present a significantly higher hurdle for reserve managers to diversify into the CNY. It would require active diversification out of other currency holdings (i.e. sell existing dollar assets) to acquire the CNY.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Hume's picture

Unless it floats, it will never be a reserve currency.  Raise your hand if you think Beijing lets the yuan appreciate.  That's what I thought.

Laughing.Man's picture

IIRC, the Chinese don't want to have the WRC status.

stacking12321's picture

the yuan will never be taken seriously until it is backed by BITCOIN!

loebster's picture

The Sept 11 Bill accelerated the death of the Petrodollar. https://goo.gl/oehIgG

YUNOSELL's picture

I don't think China wants to overtake the US dollar as the World Reserve currency -- only to take away some of the disproportionate influence and therefore unfair advantage from the US Dollar of being able to skim fees off every transaction as well as use the currency as a weapon to bully countries with sanctions

IH8OBAMA's picture

The problem is (and everyone knows this) Asians, including the Chinese, have small dicks.  They just can't swing them against the Big Dicked Americans and Europeans.

 

Honest Sam's picture

And Macaws, goldfinches, titmouse. and black-rumped warblers.

shamus001's picture

Are you smoking fairy dust? The "End Goal" for ANY government is POWER & CONTROL (especially for a Communist Govt) Step by step, first claiming innocent "parity and fairness" and once footing is positioned, then Complete Dominance and Control of Global Finances.

Look, im not picking on them, thats exactly what the U.S. did when the chips fell in its hands. Men seek POWER over all things. (And Communism is about control over the masses and the direction of a few Oligarchs on top)

chestergimli's picture

NO one out there wants power like the Khazarian Jew wanabees. I believe they are the oligarchs and control said government which you are speaking of.

nmewn's picture

So anyways (OT) cuz ZH doesn't want to report it for some reason, IRS Kommisar Koskinen is out come mid-November.

Something to do with abuse of authority, Lois Lerner, Holly Paz and equal treatment under "the law" (lol) for all citizens...or sumpin...and...

Still Winning ;-)

tmosley's picture

For a petro-currency to be a thing, EVERYONE must be FORCED to trade that currency and only that currency for oil. That is not what is happening here. Rather than the rise of the petro Yuan, it is the fall of the petro-dollar.

Lurk Skywatcher's picture

Exactly. The author talks about all the work China needs to accomplish to overturn the current standing of the USD as though the USD is an immovable structure on a solid footing. Nothing could be further from the truth, and as such, this analysis is fatally flawed. One sided hogwash.

What happens when nations no longer trust the USD? What happens when the US can no longer effectively FORCE people to use USD?

China doesn't need to replace the USD, all China needs is to position itself well for the USD's inevitable fall.

Golden Showers's picture

I agree with both of you. Let's just say with broad brushstrokes that the Chiness would have the Yuan be the new reserve currency. The US dollar is a target. How could it not be a target?

On the other hand, there is no such thing as a US Dollar. There is a Federal Reserve. The association of one fiat is arbitrary. But wait until the private banking cartels are done with one species of money and go onto the next. China is an emerging marketplace that shows promise and discipline. Why not the Yuan? Centralized government in place, no bullshit. But China works with Russia, Iran, North Korea. China is kind of a wildcard. So for now, no dice.

You never know what China has up it's sleeve. Or do you?

It really doesn't matter. It doesn't matter about reserve currency in a free market. Forcing American colonies to pay taxes in pounds didn't work out so well for the crown. K. So, whatever.

This sort of thing goes way back to this dude named Jesus who kicked over the money changers' tables kind of stuff.

I'm of the opinion that it really doesn't matter what currency is the WRC. I don't think it matters a great deal. Fiat is fiat.

I have to wonder though. Seriously. Hear me out. If carbon monoxide and carbon dioxide are produced through the consumption of oil, it's refinement, it's chemical reaction in automobile engines, power plants, factories, and the like, if one taxed carbon emissions from the source instead of the end user, I wouldn't want a petro-dollar. I'd be fucked.

Do any of you see the logic of this? Let's say I pump a barrell of oil out of the ground and it goes to make a gallon of gas, two bolts of polar fleece, a 4 by 6 foot wad of fiberglass insulation and an acre of fertilizer. Do I get taxed on the carbon footprint of that barrel of oil? No. Never. That's a joke. I take a resource from other people and profit from it and the end user pays a tax to the state that is "fair" or "apportioned". But never the producer of the commodity. Just like the Federal Reserve.

The Fed Creates money, without tax. Taxes us on the fake value of a worthless asset. Cannot possibly expect us to return any more than was printed and you have slavery. If you think paying a luxury tax on your car is alright. Then buy it. But the producer of a luxury car will never pay a tax on their property that they produced.

You all are fucked. Worrying about non-issues splitting hairs.

There is no reserve currency. No world reserve currency, and no currency. It doesn't matter. It's a joke.

Sages wife's picture

Yes, the fall of the petro-currency monopoly experiment. Hmm...let's see...tried gold,...petroleum,...what is it that will completely enslave humanity?...Ah ha!...sustenance. Beware Monsanto and it's kind; they morph like Blackwater; become not diluted, but disseminated. The suicide plant. Short mankind.

Åristotle's picture

...not that oil is necessary as a reserve anyway, for example, Britain, France, Netherl, Spain Portugal...Must be something else that determines the status.

Mr_Potatohead's picture

There was another Aristotle who nicely addressed the issue about oil and reserve currencies --> http://www.usagold.com/halloffame.html#anchor318280

I encourage you to read this before you embarrass yourself futher.

11b40's picture

 Very interesting article.  I would like to see an update, as this is 15 years old, or more.  A lot has happened since, especially in the ME.

WallHoo's picture

What is that?Milton friedman getting owened by reality again and again??

any_mouse's picture

Each had the dominant maritime military force of the time.

Global trade was denominated in that nation's currency.

The Global Force for Good Reserve Currency Status.

Oil is the dominant good traded internationally.

Everything consumed and everything produced, depends on oil and gas.

The FRN is worth something because the USA makes sure the oil flows.

"Someday, son, this reserve currency status is going to be over."

Mr_Potatohead's picture

China is no different than the US.  It being a part of the SDR basket speaks volumes.  Their game is the same as all others in the SDR basket: (1) work toward implementation of the SDR as the global reserve; (2) keep national currencies in order to allow rotational inflation/depreciation to rob the masses; (3) pretend that you're not part of the elite plan to create global gov't and global serfdom; and (4) make sure nothing can mount a serious challenge to the guys (currently) calling the shots.

Winston Churchill's picture

it speaks to nothing but the gullible westerners that thought the Chinese were serious about the SDR.

Those same oligarch families that inflicted the Opium  Wars on China.

The Chinese are known for their long cultural and institutional memory,they have not forgiven or

forgotten.The Russians are the same and remember who foisted bolshevism on them for seventy years.

I'm glad I won't live long enough to see the revenge and retribution that is going to be dished out at some point.

Mr_Potatohead's picture

What do you mean?  Am I to assume that the folks calling the shots for the Chinese aren't talking to the folks calling the shots for the US, etc.?  Nixon and Kissinger started the train down these tracks with their dialog with China.  The latter wrote a book called 'New World Order", which is pretty clear about its aspirations for the future. I don't understand why the Russians apparently have been cut out of the action, but I (unlike tmosley) don't pretend to know all of the answers.  Whatever the case, I'd be shocked if China and US were playing a different tune.

Winston Churchill's picture

I'm more a student of human nature than grandiose ideas of a psychopath like Kissinger.

If you don't know who the mark is at the poker table,its you.........

11b40's picture

Maybe so, but it helps to know the other players, and how many marks there are.  If I am a 'markee', who is the 'marker'?  Is it a nation, or is it an invisible hand at the table?

GooseShtepping Moron's picture

I'm sure this article is quite informative, but nobody yet knows "everything you need to know: about the petro-yuan. This is a game changer.

SeuMadruga's picture

USD WRC status was a consequence of WWII.

RMB WRC status might well be the cause of WWIII.

redc1c4's picture

the "petroyaun", like the regular one, is only as good as the PRD economy...

now, having read ZH all these years, i was given tu understand that was shakier than quicksand in an earthquake.

so why try and sell all these wolf cookies now?  you can't have it both ways, Gus.

Hugh Mann's picture

Layman's Terms: More of the same, just a different name.

Yen Cross's picture

 Another stupid "doom porn" article.

rkoen's picture

In other words if only there could be consistency in Chinatown...

 

Winston Churchill's picture

The CBs will shed dollars but buy gold ,not yuan for their reserves, same as Russia is now.

Why ?

Because no hegemon has gone quietly into that long goodnight,except the UK sortof.That was more

a changing of the guard,and a world war was already raging.

There is only one currency in wartime and its not a fiat and won't be a crypto either, thats how the US had so much gold at the

end of WWII afterall.

Anybody that cannot see whats coming down the pike, is blind,  stupid,or both.

Once that happens, no gold on the barrelhead,you get nothing.

Honest Sam's picture

In a rational world you are right.

Butt, you have to be an imbecile, a lunatic, and likely, long long gold to believe in a raional world at the juncture of our current geological age. 

Do you really think that rationality trumps chaos, the kind of chaos that is orchestrated by the Power Elite? 

Winston Churchill's picture

Do you have an argument instead of ad hominem attack ?

I doubt it, are you related to Mosley ?

Whether you like it not, the world will return to a gold standard, its just the repeating cycle of history.

All hegemons start with that,sound money, before human nature, which does not change,corrupts them.

Because YOU cannot imagine that,doesn't make it not so.Its called cog.diss, and will be rudely cured.

 

SeuMadruga's picture

Even madness is endowed with its own logic, which could end up being consistent with a return to a gold standard eventually...

Rebelrebel7's picture

ALERT! ZERO HEDGE APPEARS TO HAVE BEEN HACKED BY KURODA OR XI! 

WHERE IS TYLER DURDEN?! FREE TYLER TURDEN! 

"The World Bank's former chief economist wants to replace the US dollar with a single global super-currency, saying it will create a more stable global financial system."- Tyler Durden OCTOBER 24, 2017

http://www.zerohedge.com/news/2017-10-24/its-huge-story-china-launching-...

It is illogical to base any currency on something that is GUARANTEED TO DIMINISH IN SUPPLY, AND THAT HAS A SUPPLY THAT CANNOT BE REPLENISHED! 

IT WILL GUARANTEE INFLASTION BY THE VERY NATURE OF A GUARANTEED DIMINISHED SUPPLY! 

 

Xi is a skillful psychopath and master of the art of persuasion and has evidently decided to relive the life of Ghengis Kahn.  Nobody ever announces to the world that they have the sole intention of becoming a global tyrant and nations suddenly sign trade deals and international banking contracts with them! 

If you are not completely senile, you will recall that Barack Obama had practically convinced the world that he walked on water, was awarded the Nobel Peace prize for a speech in Berlin, maintained 2 wars, started 5 new ones, was the king of a real life video drone strike game, where he would choose who would be the next drone strike victim based on arial surveillance photography alone, and was the only modern president to be at war everyday of his 8 year reign of international terror!

Xi has already shown signs of his psychopathy through the seizure of Venezuelan Amazon gold mines, and the biggest ripoff scheme in world history, the Yuan global currency based on oil futures contracts 

There is no logical reason to link currency to oil. This was evidently a Nelson Rockefeller, Henry Kissinger conspiracy.  The clues are everywhere! 

I have been writing about this for the past ten days or so, and the Rockefellers, for years.

In 1973, Nixon ended the Oil Imports Limit,  which was previously limited to 12.5% of annual oil consumption. Nelson Rockefeller was Nixon's Assistant Secretary of State at the time. It is highly probable that John D. Rockefeller was the one that lobbied for the Oil Imports Limit in the first place. 

Oil had gone from $3..00 a barrel, to $12.00 a barrel, supposedly as a result of backing Israel in the Yom Kippur war,  which the U.S. stupidly did, since Israel threatened to rain weapons on the world if we didn't support them. OPEC nations retaliated, supposedly,  by initiating the oil embargo, which took the price from $3.00 a barrel in 1973, to $12.00 a barrel in 1974. 

Suddenly, the OPEC nations that wanted to destroy our economy for supporting Israel in the Yom Kippur war wanted to link the price if oil to the U.S. dollar ?! Really?! Maybe they will have the last laugh after all!

I'm sorry but a 400% price increase, as a result of losing 12.5% of the oil that we had used annually, could not be  possibly justified by  anything other than price rigging.  They could have made up for the difference with Central and South American oil.

It seems that Rockefeller was unwilling to accept the new dollar delinked from gold for oil, and that he and Kissinger conspired the entire thing, to benefit  the Rockefellers,  and Israel. 

The Davos World Economic Forum coincidently began in 1974, where the wealthiest Americans and people around the world, suddenly had the urge to rush off to Switzerland once a year to discuss economics. It must be for their phenomenal hotdogs.

Rockefeller is also responsible for the Federal Reserve Act of 1913. His daughter married Nelson Aldrich who created it, at his request. 

The Rockefellers and Morgans were competing for world domination.

WELL, THIS SURE AS HELL WILL NOT WORK!

IT IS A PHYSICAL IMPOSSIBILITY!

THIS IS SHEER FRAUD!

THIS IS SO UNWORKABLE, THAT IT'S DOWNRIGHT INSULTING!

If every person on earth had an equal amount of gold, it would be the equivalent of 5 gold rings, per person.

Central Banks and governments throughout the world possess 18% of all of the gold in existence.http://www.numbersleuth.org/worlds-gold/

The World Bank, BIS, and Chinese government are evidently setting up a giant rip-off plan! The oil futures, gold, yuan system is an economic impossibility! World oil consumption is 35 billion barrels a year!

NO BANKERS REALIZED THIS?! KURODA DIDN'T SPOT THIS?! 

JPM THAT SIGNED UP FOR THIS WITH THE INE DIDN'T NOTICE THIS?! PUTIN, SALMAN, AND KHAMEHNEI DIDN'T NOTICE THIS?!

Even with the fractional reserve ratio of 1/10 , it still doesn't work! All of the gold  in existence, 165,000 metric tons, is worth about $6.785 trillion dollars! Governments own only 18% of that! The world consumed $1,75 trillion of oil last year, and global GDP is $80 trillion! If China were to become the new currency leader for the entire world, there still is not enough gold on earth with fractional reserve banking convertible to physical gold!

I KNOW HOW YOU PEOPLE THINK!

THAT EVERYONE IS DUMBER THAN YOU ARE, AND YOU WILL CONVERT YOURS TO GOLD BEFORE EVERYONE ELSE DOES!

NO PROBLEM IF YOU DESTROY THE ENTIRE GLOBAL ECONOMY,

NO PROBLEM IF PEOPLE STARVE!

YOU'RE ALL SICK AS HELL!

SORRY! CAT'S OUT IF THE BAG

A debt based monetary system under the ownership of privately owned central banks is also an economic  impossibility. Their rationale,  fuck everyone else, as long as I get mine.

Rebelrebel7's picture

.ALERT! ZERO HEDGE APPEARS TO HAVE BEEN HACKED BY KURODA OR XI! 

WHERE IS TYLER DURDEN?! FREE TYLER TURDEN! 

"The World Bank's former chief economist wants to replace the US dollar with a single global super-currency, saying it will create a more stable global financial system."- Tyler Durden OCTOBER 24, 2017

http://www.zerohedge.com/news/2017-10-24/its-huge-story-china-launching-...

It is illogical to base any currency on something that is GUARANTEED TO DIMINISH IN SUPPLY, AND THAT HAS A SUPPLY THAT CANNOT BE REPLENISHED! 

IT WILL GUARANTEE INFLATION BY THE VERY NATURE OF A GUARANTEED DIMINISHED SUPPLY! 

 

Xi is a skillful psychopath and master of the art of persuasion and has evidently decided to relive the life of Ghengis Kahn.  Nobody ever announces to the world that they have the sole intention of becoming a global tyrant and nations suddenly sign trade deals and international banking contracts with them! 

If you are not completely senile, you will recall that Barack Obama had practically convinced the world that he walked on water, was awarded the Nobel Peace prize for a speech in Berlin, maintained 2 wars, started 5 new ones, was the king of a real life video drone strike game, where he would choose who would be the next drone strike victim based on arial surveillance photography alone, and was the only modern president to be at war everyday of his 8 year reign of international terror!

Xi has already shown signs of his psychopathy through the seizure of Venezuelan Amazon gold mines, and the biggest ripoff scheme in world history, the Yuan global currency based on oil futures contracts 

There is no logical reason to link currency to oil. This was evidently a Nelson Rockefeller, Henry Kissinger conspiracy.  The clues are everywhere! 

I have been writing about this for the past ten days or so, and the Rockefellers, for years.

In 1973, Nixon ended the Oil Imports Limit,  which was previously limited to 12.5% of annual oil consumption. Nelson Rockefeller was Nixon's Assistant Secretary of State at the time. It is highly probable that John D. Rockefeller was the one that lobbied for the Oil Imports Limit in the first place. 

Oil had gone from $3..00 a barrel, to $12.00 a barrel, supposedly as a result of backing Israel in the Yom Kippur war,  which the U.S. stupidly did, since Israel threatened to rain weapons on the world if we didn't support them. OPEC nations retaliated, supposedly,  by initiating the oil embargo, which took the price from $3.00 a barrel in 1973, to $12.00 a barrel in 1974. 

Suddenly, the OPEC nations that wanted to destroy our economy for supporting Israel in the Yom Kippur war wanted to link the price if oil to the U.S. dollar ?! Really?! Maybe they will have the last laugh after all!

I'm sorry but a 400% price increase, as a result of losing 12.5% of the oil that we had used annually, could not be  possibly justified by  anything other than price rigging.  They could have made up for the difference with Central and South American oil.

It seems that Rockefeller was unwilling to accept the new dollar delinked from gold for oil, and that he and Kissinger conspired the entire thing, to benefit  the Rockefellers,  and Israel. 

The Davos World Economic Forum coincidently began in 1974, where the wealthiest Americans and people around the world, suddenly had the urge to rush off to Switzerland once a year to discuss economics. It must be for their phenomenal hotdogs.

Rockefeller is also responsible for the Federal Reserve Act of 1913. His daughter married Nelson Aldrich who created it, at his request. 

The Rockefellers and Morgans were competing for world domination.

WELL, THIS SURE AS HELL WILL NOT WORK!

IT IS A PHYSICAL IMPOSSIBILITY!

THIS IS SHEER FRAUD!

THIS IS SO UNWORKABLE, THAT IT'S DOWNRIGHT INSULTING!

If every person on earth had an equal amount of gold, it would be the equivalent of 5 gold rings, per person.

Central Banks and governments throughout the world possess 18% of all of the gold in existence.http://www.numbersleuth.org/worlds-gold/

The World Bank, BIS, and Chinese government are evidently setting up a giant rip-off plan! The oil futures, gold, yuan system is an economic impossibility! World oil consumption is 35 billion barrels a year!

NO BANKERS REALIZED THIS?! KURODA DIDN'T SPOT THIS?! 

JPM THAT SIGNED UP FOR THIS WITH THE INE DIDN'T NOTICE THIS?! PUTIN, SALMAN, AND KHAMEHNEI DIDN'T NOTICE THIS?!

Even with the fractional reserve ratio of 1/10 , it still doesn't work! All of the gold  in existence, 165,000 metric tons, is worth about $6.785 trillion dollars! Governments own only 18% of that! The world consumed $1,75 trillion of oil last year, and global GDP is $80 trillion! If China were to become the new currency leader for the entire world, there still is not enough gold on earth with fractional reserve banking convertible to physical gold!

I KNOW HOW YOU PEOPLE THINK!

THAT EVERYONE IS DUMBER THAN YOU ARE, AND YOU WILL CONVERT YOURS TO GOLD BEFORE EVERYONE ELSE DOES!

NO PROBLEM IF YOU DESTROY THE ENTIRE GLOBAL ECONOMY,

NO PROBLEM IF PEOPLE STARVE!

YOU'RE ALL SICK AS HELL!

SORRY! CAT'S OUT IF THE BAG

A debt based monetary system under the ownership of privately owned central banks is also an economic  impossibility. Their rationale,  fuck everyone else, as long as I get mine.

Honest Sam's picture

I thought Switzwerland was only famous for it's secret bank accounts, fully armed citizens, watches, and Ursula Andress. 

Now I find out it has 'phenomonal hot dogs.'

THIS is why I don't dump ZH. 

Rebelrebel7's picture

Why do you think that they have constructed the walls, and had the military at Davos ?! They are $75.00 each!

mister0_1's picture

China now is what America was in the industrial revolution. Don't let your guard down. They are a force to be reckoned with regardless if you agree or not. 

DaBears's picture

The well known ponzi scheme that is Bitcoin has a better chance at being world's "reserve currency" than some Pegged Mao-noploy money. Remember the last round of "USD destruction" because China opened a Gold exchange in Shanghai? YAWN!!! (but keep stacking though)

OverTheHedge's picture

When all the central banks convert their gold to bitcoin, I will pay attention. Until then, bitcoin is not money, and not a currency. I am still not entirely sure what it is. A fad? A fetish? A dream for a new, better world?

tmosley's picture

>I'll pay attention to a paradigm shifting trend only after it has reached 100% saturation

Wew.

ItsAllBollocks's picture

Call bitcoin whatever you like, mine have gone up over 1000% in 6 years and it's only just beginning pmsl

erk's picture

Just use Bitcoin to settle oil purchases. It would be perfect, it's the obvious neutral solution staring everyone right in the face.

Way better than these centralzized goverment currencies conjured out of thin air.

 

 

Arnold's picture

I would need a Daily London Fix to use it with more criminality and less speculation.
oh... and the Bank of International Settlements would need a bigger boat.