There is speculation from a few news sources that China will “compel” Saudi Arabia to pay for oil in Yuan. This would change the face of the global economy and could potentially be looked back on in years to come as one of the first examples of Beijing emerging as the lynchpin of the global economy.
Currently the global oil industry is run through dollars. If you want to buy oil from an OPEC (Organization of the Petroleum Exporting Countries) member you pay in dollars. This has been the case since the agreements of the early 1970s. It gives the US a lot of influence and leads to many oil-exporting nations currently pegging their currency to the dollar (Saudi Arabia and the United Arab Emirates are two examples).
This has been a strategic objective for China for many years now. As their percentage of global demand grows, and exceeds that of the US, they are increasingly dissatisfied with having to manage their outgoing in dollars. I think a number of factors have convinced them that now is the time to up the ante on this bid.
The US has hugely expanded its oil production over the last ten years. In 2006, according to the BP Oil Review 2016, the US was producing 6.8 million barrels of oil daily. By 2016 this figure was 12.4 million. China wants the clout that comes with being the world’s largest oil importer. The US production looks set to continue to rise as Trump is a big advocate in deregulation, which should lead to increased production from fracking.
Trump’s presidency is a factor in other ways as well. His scatter gun approach to diplomacy, and his lack of focus and clear strategic aims have not gone unnoticed in Beijing. A key doctrine of Obama’s foreign policy was a pivot away from the Middle East to Asia Pacific. This hasn’t been fully executed and I think China believes it is possible to increase its influence in the Middle East (commercially for now) while defending its own interests in the Pacific.
There have been other moves afoot recently which seem to indicate that a lot of talks and jockeying for position is happening in global diplomacy behind the scenes. King Salman of Saudi Arabia visited Moscow last week. Must of the global press fixated on the malfunction of his solid gold elevator as he descended from his plane. However, a Saudi King visiting Russia was almost unbelievable until recently.
Russia and Saudi Arabia have been on opposing sides of almost every conflict over the last thirty years, the most recent example of which is the Syrian War. Saudi Arabia now looks to be carving a new niche in the world, under the indirect leadership of the Crown Prince Mohammad bin Salman. It evidently sees good relations with China as the future cornerstone of this policy.
China has prudently decided to test this non- dollar trading with a key ally initially, Russia. Last Monday, China established its first payment versus payment system for Chinese Yuan and Russian Rouble transactions. This is an early test for further PVP systems with key trading partners on its Belt and Road Initiative.
Moving the global oil economy to Yuan will not be a simple task. The US will not take this lightly and may see it as an act of economic war. There is already a lot of tension simmering between the US and China over claims of “unfair trade practice” by the Chinese. I genuinely believe China has allowed the US/North Korea spat to simmer to distract Trump from this issue.
Attempts to trade oil in Euros by other nations in the past have met with thinly veiled threats (Iran) and perhaps may even have been one of the causes of violent action (Libya).
Ultimately though, China is a completely different beast. The US will not be able to intimidate or threaten them into backing down if China believes now is the time to openly challenge US hegemony in such a direct way. The “if” here is crucial. China may continue to discreetly conduct trade agreements, projects and further PVP systems until their power is further consolidated.
Currently, with the US being pulled in a hundred directions by an aimless President, China’s power relative to its great rival grows every day without having to do anything. China’s ascent has been built on a singular vision fuelled by trade agreements and discreet investment. They will not reveal their hand until they are certain their position and economic power is unassailable. They only thing certain is that China’s hegemony of the global economy is getting closer every day…