Another blow against the so-called “petrodollar,” or use of the dollar to price and buy energy, came on March 28th, when a Chinese company and a French company, Total Energies, completed the first trade of liquid natural gas (LNG) in Yuan.
The trade took place on the Shanghai Petroleum and Natural Gas Exchange. The Global Times, reporting on the trade, said:
China National Offshore Oil Corporation (CNOOC), the largest offshore oil and gas producer in China, purchased a shipment of LNG from TotalEnergies through Shanghai Petroleum and Natural Gas Exchange (SHPGX), according to the official WeChat account of SHPGX on Tuesday.
The transaction was completed in cross border yuan settlement and the transaction volume was about 65,000 tons. The LNG is sourced from the United Arab Emirates.
Guo Xu, the chairman of the Shanghai Petroleum and Natural Gas Exchange, said that the yuan-settled trade is important because it is a meaningful attempt to promote multi-currency pricing, settlement and cross-border payment in international LNG trading. Similarly, Global Times reports that “Yu Jin, deputy general manager of CNOOC, said that yuan settlement can promote energy trade globalization and build a diversified ecosystem for LNG trading.”
NASDAQ notes that the trade is important because “China has placed an emphasis on settling oil and gas trades in yuan in recent years in a bid to establish its currency internationally and to weaken the dollar’s grip on world trade.”
The trade is particularly important given that a French company was involved, and France is a member of NATO and an ostensible US ally, as is the UAE. The trade could show growing European and Gulf nation disillusionment with American “leadership,” particularly as the economic response to the Russian invasion of the Ukraine strains Europe’s finances and American meddling in the internal politics of Gulf states over “human rights” issues infuriates the leaders of those nations.
President Xi of China announced the opening of the Shanghai Petroleum and Natural Gas Exchange in December of 2022, saying, “China will continue to import large quantities of crude oil from GCC countries, expand imports of liquefied natural gas, strengthen cooperation in upstream oil and gas development, engineering services, storage, transportation and refining, and make full use of the Shanghai Petroleum and National Gas Exchange as a platform to carry out yuan settlement of oil and gas trade.”
Continuing, he indicated that he hoped the new exchange would lead to China deepening ties with the Gulf nations in other areas, saying, “China is willing to carry out financial regulatory cooperation with GCC countries, facilitate GCC enterprises to enter China’s capital market, establish a joint investment association with GCC, support sovereign wealth funds of both sides to cooperate in various forms.”
The Yuan settlement of this LNG trade isn’t the first repricing of energy in a currency other than dollars. In September, Russian Federation President Vladimir Putin announced that China would pay Gazprom in a 50-50 split between the ruble and yuan. OilPrice, reporting on the importance of Yuan and Ruble pricing, noted that “Over the past year, Russia has turned to trade in yuan in the wake of the Western sanctions on its exports, imports, and energy trade, as the Chinese currency has become Putin’s only alternative to reduce exposure to the U.S. dollar and the euro.”
Similarly, the WSJ reported on March 15th that Saudi Arabia, a key US ally in the Gulf and the main state behind the “petrodollar” agreement, was considering accepting a proposal to price oil in the Yuan. In that outlet’s words: “Saudi Arabia is in active talks with Beijing to price some of its oil sales to China in yuan.”
If more countries begin pricing and buying energy in yuan instead of dollars, that could mean the end of the petrodollar system. Importantly, that could mean both the end of the dollar as the world’s reserve currency, a status already weakened by America’s seizure of Russian assets in the wake of the invasion, and higher US inflation, as it would no longer be able to export its inflation abroad. US Global Investors, commenting on some of the issues at play, said:
In case you’re wondering, “petrodollars” are not a real currency. They’re simply dollars being used to trade oil. Early in the 1970s, the U.S. government provided economic aid to Saudi Arabia, its chief oil-producing rival, in exchange for assurances that Riyadh would price its crude exports exclusively in the U.S. dollar. In 1975, other members of the Organization of Petroleum Exporting Countries (OPEC) followed suit, and the petrodollar was born.
This had the immediate effect of strengthening the U.S. dollar. Since countries around the world had to have dollars on hand in order to buy oil (and other key commodities such as gold, also priced in dollars), the greenback became the world’s reserve currency, a status formerly enjoyed by the British pound, French franc and Dutch guilder.
All things must come to an end, however. We may be witnessing the end of the petrodollar as more and more countries, including China and Russia, are agreeing to make settlements in currencies other than the U.S. dollar. This could have wide-ranging implications on not just a macro scale but also investment portfolios.
[…]The implications of the dollar potentially losing its status as the global reserve are numerous. Obviously, there may be currency risks, and a decrease in demand for U.S. Treasury bonds could result in rising interest rates. I would expect to see massive swings in commodity prices, especially oil prices, which could be an opportunity if you can stomach the volatility.
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