Petro-Yuan: The end of the American dollar era?

China has been planning for two decades the strategy to wrest power from the dollar in oil transactions

Petro-Yuan: The end of the American dollar era?

Leer en español: Petro-Yuan: ¿El fin de la era del dólar americano?

On March 26, China presented its expected petro-yuan, the future of crude oil that allows transactions in the oil market through the payment of Chinese yuan. The movement breaks with more than four decades dominated by the United States with the petro-dollar and, it becomes a threat to the stability of the American currency.

China is the largest consumer of oil in the world. Russia, Angola, and Saudi Arabia are its main exporters, as well as Latin Americans countries Brazil and Venezuela. According to reports by Wood Mackenzie, these South American nations exported more than 10 million tons of crude oil to the Asian country between January and June 2017.

The petro-yuan contract will be backed by gold, which could eventually displace the dollar from its dominant position in the global economy. China also offered to buy 15.4 million barrels of crude to be delivered in September. According to the Xinhua news agency, the negotiation of the new oil futures contracts started at the Shanghai International Energy Exchange at 440.20 yuans (USD 69.70) per barrel, with 42,300 registered transactions for a total volume of 18,300 million yuans.

 

 

Why does the yuan represent a threat to the dollar?

For more than 40 years, transactions for the purchase and sale of oil have been only allowed in US dollars. This gave rise to the petro-dollar and, therefore, the American currency remains high, gains relevance as a reserve currency and in turn controls the global economy.

Until before the petro-yuan, anyone who wanted to trade with oil had to do it in dollars or was forced to buy this currency before buying / selling oil. Now, China breaks the conditioning and admits the transactions with yuans, this makes the US dollar to lose relevance and it weakens against other currencies. In addition, yuan transactions minimize dependence on financial flows valued in dollars.

The launch of the petro-yuan is considered a blow to the US dollar, which in recent months has weakened. On March 26, the day on which China offered the contract to the market, the dollar fell and showed a downward behavior that was not presented since 2015. On the contrary, the price of oil was favored with the announcement of the Asian country.

According to analyzes provided by the expert in economic and investment issues, Max Keizer, very few countries have tried to negotiate with oil in the local currency and these have failed in the attempt. Keizer gives as an example to Saddam Hussein and Muammar Gaddafi, both murdered for becoming dictators of their countries and who, interestingly, tried to negotiate oil in euros. Unlike Iraq and Libya, oil producing nations, China is the main buyer of the world and it took almost two decades planning the strategy of entry of the petro-yuan into the market.

As reported by the RT media, the Chinese authorities accelerated the launch amid the growing imports of crude oil. In this way, the petro-yuan contracts cannot only help gain some control over the prices of the main international reference points, but also promote the use of the Chinese currency in world trade.

 

Latin American Post | Krishna Jaramillo
Translated from “ Petro-Yuan: ¿El fin de la era del dólar americano?”

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