by Pepe Escobar (cross-posted with the Asia Times by special agreement with the author)
Few geoeconomic game-changers are more spectacular than yuan-denominated future crude oil contracts – especially when set up by the largest importer of crude on the planet.
And yet Beijing’s media strategy seems to have consisted in substantially play down the official launch of the petro-yuan at the Shanghai International Energy Exchange.
Still, some euphoria was in order. Brent Crude soared to $71 a barrel for the first time since 2015. West Texas Intermediate (WTI) reached the highest level in three years at $66.55 a barrel; then retreated to $65.53.
A series of petro-yuan “firsts” include the first time overseas investors are able to access a Chinese commodity market. Significantly, US dollars will be accepted as deposit and for settlement. In the near future, a basket of currencies will also be accepted as deposit.
Does the launch of the petro-yuan represent the ultimate deathblow to the petrodollar – and the birth of a completely new set of rules? Not so fast. That may take years, and depends on many variables, the most important of which will be China’s capacity to bend, tweak and ultimately rule the global oil market.
As the yuan progressively reaches full consolidation in trade settlement, the petro-yuan threat to the US dollar, inscribed in a complex, long-term process, will disseminate the Holy Grail: crude oil futures contracts priced in yuan fully convertible into gold.
That means China’s vast array of trade partners will be able to convert yuan into gold without having to keep funds in Chinese assets or turn them into US dollars. Exporters facing the wrath of Washington, such as Russia, Iran or Venezuela, may then avoid US sanctions by trading oil in yuan convertible to gold. Iran and Venezuela, for instance, would have no problems redirecting tankers to China in order to sell directly in the Chinese market – if that’s what it takes.
How to bypass the US dollar
In the short- to medium-term the petro-yuan will surely boost the appeal of the Belt and Road Initiative (BRI), especially when it comes to the House of Saud.
It’s still unclear in what capacity Beijing will be part of the Aramco IPO, but that will be a decisive step towards the fateful historic moment when Beijing will tell – or compel – Riyadh to start accepting payment for oil in yuan.
Only then the petrodollar may be at serious risk – along with the US dollar as the global reserve currency.
I have stressed before how, at the 2017 BRICS summit, Russian President Vladimir Putin went no holds barred supporting the petro-yuan, specifically challenging the “unfairness” of the US dollar’s unipolar dominance.
How to bypass the US dollar, as well as the petrodollar, has been discussed at BRICS summits for years now. Russia is now China’s largest crude oil supplier (1.32 million barrels a day last month, up 17.8% from a year earlier.) Moscow and Beijing have been forcefully bypassing the US dollar in bilateral trade. In October last year, China launched a payment system in both currencies – the yuan and the ruble. And that will apply to Russian oil bought by China.
Still, the whole petrodollar edifice lies on OPEC – and the House of Saud– pricing oil in US dollars; as everyone needs greenbacks to buy oil, everyone needs to buy (spiraling) US debt. Beijing is set to break the system – as long as it takes.
The petro-yuan as it stands does not provide access to Chinese oil markets. It starts as a great deal especially for Chinese companies who need to buy oil but would rather avoid the oscillations of foreign exchange. Nothing changes for the rest of the US dollar-dominated commodity planet – at least for now.
The game will really start to change when other nations realize they have found a real credible alternative to the petrodollar, and switching to the yuan en masse will certainly spark a US dollar crisis.
What the petro-yuan may be able to provoke in the short term is an acceleration of the next crises in treasuries and bond markets, which will inevitably spill out in the form of a crisis in global currency markets.
That pan-Eurasian resource basket
The game-changing aspect, for now, mostly has to do with the exquisite timing. Beijing has crafted an ultra-long-term plan and yet chose to launch the petro-yuan smack in the middle of a period of sharp deterioration in trade relations with Washington.
The answer to the geoeconomic riddle is bound to be The Golden Moment. Eventually gold will rise to a level where Beijing – by then totally in control over physical gold markets – feels ready to set a conversion rate.
The – Arabian – ‘petro’ side of the petrodollar equation should have been replaced long ago by a priceless, captured pan-Eurasian resource basket. That was what Dick Cheney dreamed of – centering his dreams on the energy wealth of Central Asia and Russia.
That did not happen. What we have instead is shrieking, manic Russophobia – more like a graphic indication of how precarious is the position of Western banking elites. On top of it, with the petro-yuan, China deploys the key weapon, incorporated into BRI, capable of accelerating the end of the unipolar moment.
Yet this is just the initial step in an ultra-high-stakes game. One should keep one’s eyes firmly focused on the interpolations between trade connectivity and technological breakthroughs. The petrodollar may be in danger but is far from finished.
Another thoughtful, informed and masterly exposé by Pepe on one of the key issues of our times. Cheers!
Backed by OPEC, Moscow and Riyadh are negotiating a deal that would allow them long-term control of oil prices – 10-20 years!
This may accelerate the adoption of the Petro-Yuan and the demise of the Petro-Dollar.
The U.S. needs to invent and then to get control of a ‘solar-dollar’.
The script is damn wide known and runs like this:
If it were a medium or small nation to do or to try it, it would demonized by media, threatened, gotten a ‘coalition’ set against and then bombed to the stone age.
Right, mr Pompeo?
But the empire is gonna be flushed down the drain.
No, the petro-yuan will not replace the US dollar overnight as the worlds reserve currency. However, we shall see if it will take years for the petro-yuan to be accepted. I think it will take less time. The point is that China has indeed introduced the petro-yuan. However, both Russia and China intend to introduce gold backed rubles and yuans. The Russians, for example, have not only been mining gold in Siberia, they have used profits from the sale of oil and gas to purchase gold that is available on world markets. According to Dr.Jim Willie, both Russia and China have 30.000 tonnes of gold each, with the bulk of the Russian gold being held in the Kremlin. Also according to Dr.Jim Willie, there is very little gold left in Fort Knox, which is being used as a nerve gas depository, with the US Government preparing to introduce a new, domestic dollar. These facts may well explain the current anti-Russian rhetoric and that little false flag in England, with Western bankers desperately trying to do something to save the Western fiat currencies without really knowing what they have to do.
While Pepe wrote an excellent article as usual. BF I do not think the western bankers can do much about keeping the dollar alive, except what they usually have done. War, war and more war. They will blackmail and beat the crap out of all the little players. But they can’t do much to China and/or Russia. They can’t stop buying goods from China, because they hardly produce anything. Even military components are made in China. China, if need be, can squeeze their balls so hard they will pass out from the pain. But China will try to do things nicely. Releasing Petroyuan is bad enough. Saudi Arabia will eventually come to fold, because it lost a lot of money by playing along with emperor’s intent to kill Russia economically. So, Russia is gently talking some sense into their thick Bedouin heads, China says deal yuan or eat your oil. Generally speaking, if oil goes over $70 then subsidized oil companies in USofA will be able to get back, and I am not sure if this is bad or not. That’s my take on this.
Chinese demand for oil will also fall as its transportation sector turns to electric vehicles. Oil is on the slide.
Armies and plastic require real oil, MuMu
Meanwhile out of the sudden
https://www.congress.gov/bill/115th-congress/house-bill/5404/actions?q=%7B%22search%22:%5B%22gold+dollar%22%5D%7D&r=1
H.R.5404 – To define the dollar as a fixed weight of gold.
Date
03/22/2018 Referred to the House Committee on Financial Services.
Action By: House of Representatives
Considering all the factors needed for change from the petrodollar to petroyuan, the disruption and evolution will take a decade.
The US is on a strategy to destroy Russia and China as leaders of the multi-polar movement. This includes an energy strategy combined with “conflict” aimed at all transport routes for petroleum. Note where CENTCOM has increased its actions. Note the QUAD maritime initiative.
Containment is only part of the Hegemon’s game. Real destruction and chaos is what the Pentagon is foisting on BRI and normal commerce.
There is no sense that the US will withdraw from any conflict zone, nor pretend that they aren’t churning more hot spots (such as Baltic and Balkans, Taiwan and South China Sea).
The answer from the Hegemon will be violence, disruption, sabotage, destabilization via terrorism, as well as financial and sanction weapons use.
The threat to Hegemonic Rules is existential. Expect replies in kind to try to prevent the end of his reign.
With Trump in power, the Hegemon has its most perfect tactician. And the Generals who serve hegemony first have their most compliant President.
Larchmonter445
Your comment is basically correct. However, Washington and Wall Street are in big trouble. They have the largest foreign and domestic debt in the world, and the dollar is printed backed by nothing, except the US military, which is offering nations a choice between accepting the dollar or getting either regime change or a heap of bombs. Well, these methods cannot be applied to Russia and China, certainly not to Russia with it’s latest high tech on display.
That foolish false flag in England was an attempt to vilify President Putin and Russia, with London asking for political backup from the EU, which is remarkable, as the UK had BREXIT. The EU responded with symbolic gestures, with some countries expelling a few Russian diplomats, and others refusing to expel a single one. What London and Washington tried was to create a new Napoleonic Grand Alliance against Russia, and this attempt was a miserable failure. The symbolic gestures of the EU is proof of this. Germany, while expelling four Russian diplomats, gave Russia a license to build the Nord Stream – 2 gas pipeline on German territory, in open defiance to Washington’s demands.
Reading about the response in European countries, I can only conclude that this foolish attempt by London and Washington to unify Europe against Russia will lead to the opposite happening, with Europe, led by Germany, joining the Russian/Chinese camp and the Eurasian Economic Union. All the UK and US did was to speed up this process, as nobody in Europe wants to fight a war for the benefit of London and New York bankers.
Finally, I don’t think it will take a decade for the petro-yuan to be accepted. It will take much less time. After all, who really wants to use funny money called the US dollar ?
BF, the Brexit hasn’t happened, and I am scratching my head asking if it will happen.
Like all fiat currencies, the dollar is doomed long-term. So too will be the petroyaun, of course, but I nonetheless agree with Pepe here:
“The petrodollar may be in danger but is far from finished.”
That is quite true, and I’m glad to read something more nuanced than the usual doom and gloom we often hear in the alternative financial media. Yes, the dollar is cracking, and yes, it will fail. That isn’t the question. The question is when? It likely won’t be tomorrow.
Mr. Escobar believes that the death knell ultimately will be determined by “many variables, the most important of which will be China’s capacity to bend, tweak and ultimately rule the global oil market.” Maybe. It’s certainly important, and that could be the largest factor in the dollar’s demise. I’m more inclined to believe the dollar is already dying the “death of a thousand cuts” courtesy of unsustainable debt loads and endless war. I also think that SDRs will play a role long term in the dollar’s demise. In fact, I think these instruments represent potentially as large a threat to the dollar as the petroyuan does.
Either way, I agree this means higher prices for gold-much higher. Russia and China are positioning themselves for this with record-breaking accumulations over the last decade (although officially their reserves are still small relative to the USA). I am not sure China is rely read right now for a run on their gold deposits. That is sure to happen, and is a major fly in the ointment for their plans-unless their gold reserves are significantly higher than they have acknowledged, as some have speculated.
There’s a Chinese proverb that is both a warning and a curse: “May you live in interesting times.” Well, things are about to get much more interesting indeed.
A failure to deliver on gold futures on the Comex or LMBA will be the end of the USD.
While the west keeps suppressing the gold price and delivering physical for that price there is no
need to force the issue.In effect both Russia and China are getting bribed by suppressed prices.
Most western ‘markets’ are total frauds at this point and CONfidence could easily be lost completely
by a FTD.Russia and China both have massive off the books hoards of gold in excess of 40k tonnes each.
Ft. Knox in all probability is full of just spiders, no true audit has been allowed for 50 years.
Although not officially backed by gold,the USD can be be destroyed by it much quicker than 10 years.
Through back to back yuan futures in gold and oil, the petrogoldyuan was born.
The yuan will never be generally backed by gold,because of Triffins paradox ,but petroleum trading now is, big problems for the unbacked petrodollar, maybe much, much sooner than you think.
I don’t think the failure to deliver model will cause failure for the simple reason that no one is allowed delivery right now. In fact, the entire COMEX futures apparatus is simply paper contracts traded with very few PM’s stored to back up said contracts-and almost no actual deliveries. I have some experience in this because I once asked long ago for contract delivery on gold and was told by my broker essentially that they couldn’t or wouldn’t do it without offering any plausible explanation.
I am not so sure about Ft. Knox. You are right that there’s been no real verification in years, but that doesn’t sufficiently prove for me the complete absence of metals in the depository.
I would love to see some links for the 40K tons in Chinese and Russian vaults. I seriously doubt those numbers honestly but I’ve been wrong before…:)
I agree though that regardless of respective gold hoards the dollar is doomed. I would still caution that so is every fiat currency eventually, including the ruble and petroyuan. It’s just a matter of time.
Paul Craig Roberts has written extensively on paper gold futures contracts and I have had email discussions with him on the topic. According to him, there is no expectation of delivery on these contracts and the offerer must pay only a small settlement fee for non-delivery. The sole purpose of the contracts is to crash any upward movement in the price of gold.
Though it is unclear to me who the entity is who pays the settlement fee or why they would knowingly lose the settlement amount, it’s very likely that paper entities offer paper gold contracts. Equally likely that paper entities buy them. Otherwise, it is possible that both parties to the contract are in collusion and that the settlement fee is waived.
Who knows?
Certain players in the paper futures markets can demand physical delivery OR cash
settlement.RFP is the jargon when settlement is due in physical..
RFP calls as of last Friday were nearly a whole years world output.Neither market has anything like that available
to settle.There are 500 paper ounces of gold for every real ounce in inventory.
Interesting. What does RFP stand for?
By sheer momentum China will be the top nation in the 21st century and possibly beyond.
The Chinese cruise the oceans of the world with ‘win-win’ trade by way of massive supertanker traffic all over.
U.S. patrols the oceans with aircraft carrier battle strike groups. Bullying most of the planet backed up by threats and some every ten years will go to war against some hapless country, 3rd world country, and make an example out of.
The Chinese , Russians , Iranians, Pakistan (especially with the CPEC), Venezuela, Cuba, South Africa, most of Latin America and Africa.
Arab business is growing with China and there are actually a large number of Arab communities in China.
Gulf Arabs are enamored with the western Anglo- Jewish unipolar model. But they are a small fraction of the Arab world.
While the Chinese come with a handshake, speak of mutual benefits, grants, loans, projects in countries the Chinese want to do serious trade with. A good example is Angola, where the Chinese have built schools, entire cities of apartment blocks, roads, and other infrastructure.
The U.S., under the influence of Talmudic Jews whom also are rabid Zionists; they believe that Israel has no fixed borders, but is always ever growing. They imagine for the Arabs the same fate as happened to the American Indians – basically genocide, anyways, They come to the table with threats of coups, diktats, ultimatums, threats of sanctions, use of sanctions, use of its U.N. veto power to cover for war crimes in Palestine, and just about everywhere else it pleases.
The world is sick and tired and wants a change. That’s why a lot of people are exited about V.V.Putin and Russia, who are standing up to the warmongers and sowers of discord on earth. Its even more exiting when you have two giants like China and Russia working together at many levels.
Slowly but surely, countries will, and today, many want to, leave the western Judiac one-sided partnerships and gravitate to the logical on all levels choice, the Eurasian Union with its new banking systems, gold, manufacturing, vast resources, vast human resources, and especially in Russia’s case, the best scientists in the world.
The old model is slowly dying off, and they are at an impasse, to go to war or not? That is the question. They are in for a big humiliation either way. Russian technology, Chinese manufacturing and open checkbook, Iranian, Iraqi, Syrian, Lebanese armies, militias, popular mobilization forces and auxiliaries would make mince meat out of a U.S., Israeli, NATO, Euro allies forces should they try anything silly in the Middle-East. China has made up its mind on its plans for the BRI in regards to the Middle-East. Its in this thing big time.
I tell you what, it sucks to be on the losing side right now. Things don’t look too good.
I think the push for gun control via false flags is tied to the long term risk planning of the US deep state. They see a high potential for a destabilizing event in the economy or with war – and are hedging against the degree of internal conflict by trying to take the guns away. So either they see de-dollarization as real and are going to act first (new currency or war) or they just don’t know what will happen. But that’s how I see the gun control push. Incidentally, if we trust Trump to his work, his lack of desire to take away guns means his camp isn’t looking for a hard resent economically or WAR, but perhaps will achieve some sort of soft landing.
Totally!
For the first time in my life, I am agreeing with the American’s insisting on the right to carry arms amendment.
It is clear that, finally, they‘re building a case to go and round up the guns!
This action, no matter how much perception management they use, will likely cause a civil war!
That event would likely cause a US reserve currency panic, right there! (Among many, many things.)
Still, US+European gold reserves dwarf BRIC’s by about ~10 times. So, I agree that Yuan does introduces some diversity, and it is a very long (and highly windy) road to some future dynamic equilibrium.
“US+European gold reserves dwarf BRIC’s by about ~10 times.”
Supposedly.
In late October (2017), in Canada, “Royal Canadian Mint-stamped gold wafer appears to be fake, http://www.cbc.ca/news/canada/ottawa/fake-gold-wafer-rbc-canadian-mint-1.4368801
I suggest that the entire banking system of the empire is of suspect credibility.
How credible are the claims of gold reserves, made by the gangsters?
In the 1960’s and ‘70s, you hit blimp size oil pools in the US. Today, you hit beachball size pools. It takes a helluva lot of beachballs to fill a blimp.
The only reason the US is in the ME is for their oil. They almost had Russian oil on their clutches in the ‘90a until Putin arrived on the scene.
The US is in a helluva mess !
A Tesla for everyone?
Excellent article and finishing with a intrigue flourish, excellent!
Several points:
a. I understand that China has built the “…ultra-long-term plan…”, and your rational analysis suggests a slow progression, “Beijing is set to break the system – as long as it takes.“,
b. “…when other nations realize they have found a real credible alternative to the petrodollar, and switching to the yuan en masse will certainly spark a US dollar crisis.”
Question 1. : Could it happen sooner?
and once started,
Question 2. : Could it evolve faster?
You state (and I agree): “…the petro-yuan may be able to provoke in the short term is an acceleration of the next crises in treasuries and bond markets, which will inevitably spill out in the form of a crisis in global currency markets.”
Question 3. : Isn’t that exactly the kind of thing that could cause a stampede?
and, if we (the thinking people who are paying attention) assume that some kind of a ‘correction in the empire’s banking/finance/(likely) real estate status/structure (no, it will not be good) is now certainly inevitable, and … possibly overdue?!
Question 4. : How far away do you think that could be?
and, (the never-ending stream of “Golden Moments“)
Question 5. : How many variables might be manipulated, or otherwise (as if by themselves) trigger such an event?
What I’m after from the author and community braintrust:
How would it happen in a near-term, possibly propelled motivation to dump the $$ for the yuan?
What does that scenario look like?
No one — especially China — has any interest in destroying the petrodollar for the benefit of the petroyuan.
(except for some gamblers at forex). China still has 3 trillion of them.
It looks like Putin and Trump are about to usher in the penultimate paradigm shift which has to viewed as a
positive. It’s a harbinger of peace on Earth. And while it’s not the peace of song and story, it ought to be a
lot better than what appeared to be a slide back into the Cold War of the 20th century.
There is enough trouble to go around for all the players, but our planet itself is in the most trouble. As the
population of the Earth increases exponentially, the natural resources are diminishing. And both of those
events are having a negative effect on 21st century capitalism and the global economy.
Trump’s people see this and are moving in the the direction of Russia and China to get a uniform approach
to it. Trump’s appointments of characters like Nikki Haley and John Bolton only serve to keep the neocons
like Wolfowitz and the anti-communists off balance as they assume WWIII is right around the corner.
The war in Syria is practically at an end and Russia will now have to deal with Macron and not the Pentagon
to bring it to a close. The West is well aware of Putin’s calm and ‘partner-like’ response to all the crap that
Obama pulled on him and he never let his temper off its leash. He also never used his Soyuz shuttles to
punish the US.
We are now in the era of the end of the CIA, FBI, and MI6 along with the FSB operating abroad out of control.
Their domestic operations are still up to their governments and people.
The inauguration of the penultimate paradigm is just a matter of time. And there is absolutely no sense in wasting
your time in the contemplation of the Ultimate Paradigm.
A low key start up is entirely in order when it comes to setting out an alternative to the petrodollar. Beijing is entirely sane in simply commencing its strategy. Bear in mind the last world leader who made a similar announcement was promptly bayoneted through his anus and then strung up. All within 12 months of his announcement to back crude purchases with gold or the Libyan dinar. Such is the nature of hegemony.
A more subtle shift is therefor indicated. Any sane risk analysis will factor in both the Chinese plan to go fast for electric vehicles thereby displacing one major dependency on crude in the near term.
If the rest of the world is incapable of adopting such a strategy of exiting crude dependency then the slightly longer future (one century) will bring catastrophic demise of most first world economies and populations. Crude dependency will then be meaningless as will be the petrodollar. Regardless of any of that, reducing one’s economic dependency on the yankees is a very sane concept.
How do you explain the Putin factor to stupid people when professionals in the West wallow in the same ignorance? If I was to ask a Canadian worker what determines the exchange rate of Canadian dollars one in fifty would be hard pressed to explain how the dollar value is established on the international market. However, if we ask the same people about Russia and Putin all of them would give you a western media manufactured reply that Putin eats children for breakfast.
Putin is an excellent leader who wants to create an economic equal playing field where his country can participate as an equal partner. What is he doing that we are attacking him mercilessly? He is the main driving force in attempting to eliminate the US dollar as reserve currency in trade. This alone makes him enemy number one.
Let’s back up a bit and look at how the exchange rate of the Canadian dollar is established. The value of our dollar is established through trade. The more we sell the greater the demand for our dollar making the dollar more expensive in terms of other currencies like the US dollar. Who benefits from this? Anyone who buys foreign goods benefits from a high dollar, but the seller of Canadian goods suffers because our dollar makes selling our goods expensive in terms of other currencies.
The same principle applies in world trade. The US dollar is the reserve currency, therefore, US corporate sector receives a huge advantage by having the US dollar as reserve currency which serves as the basis for international financial transactions. US firms have an advantage because they have an easy access to US dollars. Since the dollar is used for trade all the world nations demand it driving the price of US dollars up. This makes imports by large corporation cheaper if the US government does not print more dollars.
The higher dollar means cheaper imports and more profit for the corporate sector. This however forces US manufacturers to close or flee to China or Mexico. The benefits accrue primarily to firms and financial institutions while the costs fall primarily on average workers.
Who hates Putin? US corporate sector because Putin and China as well as many other smaller countries want to eliminate the US dollar as the standard measure of value in trade. If that happens US corporate benefits are lost. The small players have been eliminated through war and regime change but Iran, India, Russia and China remain, and those dominoes will not fall.
Putin wants to trade currency to currency or gold thus this will eliminate economic sanctions that US uses to put economic pressure targeted for regime change. Putin and China want to eliminate the World Bank and the IMF as the intermediaries for the US dollar. US Corporate sector is defending these institution by attacking smaller vulnerable countries (Venezuela, Brazil, Argentina, and Africana as well as Middle East countries) that like the Putin policy.
Is Putin the enemy? Not really. Our corporate sector is the enemy. US dollar as reserve currency is the enemy because the average worker pays the price in job losses and higher costs for goods. Replacing the dollar with an international standard or system will help Canada, US and the world economy by creating opportunities for domestic production and fair trade that will benefit workers rather than the corporate owners.