GCC Eyes China’s All-Yuan, All-Energy Offer

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China “will continue to import large quantities of crude oil on a long-term basis from GCC [Gulf Cooperation Council] countries and purchase more LNG” and the Shanghai Petroleum Exchange “will be fully utilized for RMB settlement in oil and gas trade.” That’s a strong statement, and since it was made by China’s powerful President Xi Jinping in a face-to-face meeting with leaders of those countries just last month, it would seem to carry lots of weight. Yet it has received oddly little attention in the West. Those with a stake in the dollar’s long, near-exclusive role in oil trading should not assume the yuan-payment offer will be rejected. On the contrary, there are reasons aplenty to think it will be accepted, albeit perhaps gradually. Extension of Xi’s offer to include “all-dimensional energy cooperation” and aid in developing high-tech industries could prove even more consequential. A balanced new/old energy relationship between New Energy kingpin China and the world’s leading oil producers looks to be in the making, denominated in “all-energy yuan.”

As recently as November, the notion of dollar-displacement in oil trading beyond countries targeted by US sanctions looked possible, but still distant and far from certain. That changed when Xi held a December summit in Riyadh, not just with the Saudis but with other GCC and Arab League leaders, including officials from the UAE, Qatar, Iraq and Egypt. The tensions evident in US President Joe Biden’s trip to Jeddah last summer to try and extract more oil from Crown Prince Mohammed bin Sultan were nowhere evident as Xi enumerated the “priority areas” in which China is proposing to work with GCC countries over the “next three to five years.”

China will not just continue to buy lots of oil and more LNG, Xi said. It will also “strengthen our cooperation in the upstream sector, engineering services, as well as storage, transportation” and refining. Xi was explicit: The yuan will be the currency for all that. He didn’t say “not dollars.” It was clear. What he did say was that the China-GCC relationship won’t be only about oil and weapons. Other areas for closer cooperation listed by the Chinese leader were “clean and low-carbon technologies involving hydrogen, energy storage, wind and photovoltaic power and smart power grids, as well as localized production of new energy equipment,” and peaceful nuclear energy.

“China is ready to build big data and cloud computing centers with GCC countries, strengthen 5G and 6G technology cooperation, build together innovation and entrepreneurship incubators, and implement ten digital economy projects in such areas as cross-border e-commerce and communications network.” Xi also mentioned aerospace and meteorology.

Fancy Financial Tools

What Xi offered the GCC was, in effect, a partnership aimed at full economic diversification, something the oil states have started to seek in a focused way now that the energy transition looms — and which schemes drawn up by Western consultants that focus heavily on petrochemicals, tourism and futuristic cities seem unlikely to achieve. It’s an appealing offer. It feels compelling if you recall, first, that China has long topped the list of desirable markets for oil and gas exporters due to its central role in global demand growth; and, second, concern about keeping up with the competition. Because of US sanctions, Russia, Iran and Venezuela already trade oil with China in yuan — and they sell it at a sharp discount to Western market levels.

Xi’s mention of the Shanghai Futures Exchange being “fully utilized” is recognition that if the Gulf states are to use a currency other than dollars in oil transactions, they will require elaborate hedging tools. Cooperation between sovereign wealth funds and other forms of investment were aired in Xi’s talk, as well. In a barely disguised statement of China’s intent to keep all this outside the reach of US sanctions, he added: “The two sides could start currency swap cooperation, deepen digital currency cooperation and advance the m-CBDC Bridge project.”

CBDC stands for Central Bank Digital Currency, and the m-Bridge Project was a pilot under the auspices of the prestigious Bank for International Settlements (BIS) that, as of December, had successfully built a blockchain to handle multi-currency cross-border payments in CBDCs. Participants in that pilot were the central banks of China, the UAE, Thailand and Hong Kong. This means UAE financial authorities already have experience handling trade deals with China outside the Swift financial communications system used by Washington to enforce its most extreme unilateral sanctions, including against Iranian and Russian banks.

It’s worth recalling that India has been paying for Russia oil partly in UAE dirham over much of the last year — while the UAE Central Bank was experimenting in CBDCs with China at BIS. Maybe the two things aren’t connected. Maybe they are. Certainly they both point to Gulf participation in non-dollar oil trading. Adding to a sense of momentum, Saudi Finance Minister Mohammed Al-Jadaan told Bloomberg TV during the Davos World Economic Forum that the kingdom is “not ruling out any discussion” that would increase trade, including the use of currencies other than the dollar. Heavy gold purchasing of late by the Chinese and Russian central banks is a sign that these countries are striving to more solidly ground their currencies without recourse to the dollar.

Does It Matter?

Let’s suppose for a moment that Saudi Arabia , UAE and perhaps Iraq, whose president was in Riyadh for Xi’s speech, do move into yuan pricing of oil over the next three to five years and that China moves into a prominent spot providing renewable energy and high-tech investments to the region. What does it mean for Western oil companies, that would presumably continue to buy oil in dollars and some of which, most notably TotalEnergies in Iraq, are aiming for integrated old-new energy deals?

Zoltan Pozsar, a senior investment analyst at Credit Suisse and the Wall Street analyst who has most vocally warned about threats to the petrodollar, says this “oil for development” deal — in contrast to the US’s “oil for arms” arrangement — will result in China having the equivalent of a mortgage on Arab Gulf, as well as on Russian, Iranian and Venezuelan oil. That means it will pay less. This isn’t just losing the Asian premium, it’s imposing a potentially much larger Western premium.

Such pricing shifts may not hurt the US all that much, since it has its own oil and gas that traditionally carry their own discounts. But assuming the Europeans, Japan, South Korea and others stick with dollar payments, a further price penalty will be added on top of whatever self-imposed premium they are already paying for their oil and coal embargo of Russia.

What could hurt the US in all this is the loss of power and prestige that goes with the dollar’s demotion in trade financing and foreign reserve holdings. If oil trading moves off the dollar, other industrial and agricultural commodities aren’t likely to be far behind. Barring a war with China, the dollar will probably retain a portion of its so far massively dominant position in the international financial order. But even a less-than-complete demotion for the dollar could make the chronically huge US trade and government spending deficits much more expensive to finance, adding to momentum behind re-industrialization of the country, but also locking inflation in place. The era of cheap everything from Amazon and Walmart would be over, and Washington might have trouble buying its way out of recession to the extent it did in 2009 and 2020-22.

It will also end Washington’s ability to slap sanctions on other countries at will and, most worrying in some ways, it will be a humiliating blow to US prestige. What that would mean either in the geopolitical arena or to already fractious US domestic politics is impossible to know and hard even to guess at. But it seems unlikely much of anybody will be able to continue ignoring the fate of the “petrodollar” for all that much longer.

Sarah Miller is a former editor of Petroleum Intelligence Weekly, World Gas Intelligence and Energy Compass.

Trade, Fiscal Terms, Sanctions, Oil Trade
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