Will the Petro-Yuan Be the Death Knell for the Petrodollar?

Abstract

The 26th of March 2018 will go in history as the most momentous day for the United States’ economy, China’s economy and the petrodollar and also for China’s status as an economic superpower. In that day China launched its yuan-denominated crude oil futures in Shanghai thus challenging the petrodollar for dominance in the global oil market. Right now, China is the number one exporter on the globe, the largest crude oil importer in the world and also the world’s biggest economy based on purchasing power parity (PPP). The Chinese would like to see global currency usage reflect this shift in global economic power. The petrodollar system provides at least three immediate benefits to the United States. It increases global demand for US dollars. It also increases global demand for US debt securities and it gives the United States the ability to buy oil with a currency it can print at will. In geopolitical terms, the petrodollar lends vast economic and political power to the United States. China hopes to replicate this dynamic. Maintaining the petrodollar is America’s primary goal. Everything else is secondary. The paper will argue that the launching of the crude oil benchmark on the Shanghai exchange could mark the beginning of the end of the petrodollar. It will also argue that the imposition of tariffs on Chinese goods could be the first shots in the petro-yuan/petrodollar war of attrition. This could escalate into a trade war between the two countries and a possible wider conflict beyond. The paper will maintain that it won’t be easy for the petro-yuan to unseat the petrodollar without the participation of Russia and Saudi Arabia. And while Russia is already on board, China is now trying to persuade Saudi Arabia to start accepting the petro-yuan for its crude oil. If the Chinese succeed, other oil exporters could follow suit. The paper will conclude that it is probable that the Chinese yuan will emerge as the world’s top reserve currency within the next decade with the petro-yuan dominating global oil trade backed by gold.