As Hormuz Tolls Settled in Yuan, Is Chinese ‘Petroyuan’ Viable?

Happy Easter, dear AP readers.

He Is Risen.

Covering a topic (at least ostensibly) unrelated to the resurrection of Christ, the potential future of the “petroyuan” has never looked so bright.

That the petrodollar underpins the dollar’s status as global reserve currency is a persistent geopolitical truism because it’s true.

(It’s so vital to American hegemony, in fact, that the United States and its allies have historically gone to great lengths to protect the petrodollar, including regime change. When Gaddafi tried to take oil-rich Libya off the plantation, for instance, he wound up sodomized with a bayonet, an ignominious end meted out by neoliberal apex predator Hillary Clinton as retribution for attempting to create an alternative “gold dinar” pan-African currency.)

Related: Columbia U Video Promotes Hillary Clinton’s New Foreign Policy Course

When everyone wants dollars because they need them to trade with, the dollar inherently becomes more valuable, even though it’s not based on any hard assets.

Another strategic value of the petrodollar is that the various sanctions regimes the United States and its partners impose on what it considers rogue states, as a constant implicit threat to keep state actors in line, carry enormous weight.

The TL;DR on the petrodollar, although it’s certainly been written about in much greater detail with much greater precision by others, is that virtually all global oil trade, the lifeblood of every modern economy, is conducted in dollars, thereby inflating demand for dollars and allowing the unlimited money-printing bonanza that the U.S. government has been on since the end of the gold standard in the 70s.

Conversely, reduced dollar demand would lead inevitably to higher interest rates, in turn leading to higher interest rates on U.S. treasuries and eventually, if it’s bad enough, collapse of the U.S. economy.

Related: Kenya Abandons U.S. Dollar, Petrodollar Decline Accelerates

Critically, in the context of the Iran war, the petrodollar regime is part of the longstanding arrangement with the Gulf States dating back to the 1970s, following Nixon's unpegging of the dollar from gold, in which they agree to trade oil in dollars in exchange for U.S. security guarantees.

Via Fortune:

“Middle East oil has long been a linchpin of the U.S. dollar’s status as the dominant currency in global trade and reserves, but President Donald Trump’s war on Iran could open the door to China’s currency, according to Deutsche Bank.

In a note on Tuesday, analysts pointed out that the current “petrodollar” regime goes back to a deal struck in 1974 when Saudi Arabia agreed to price its oil in dollars and invest surpluses in U.S. assets.

And because oil is a core input to global manufacturing and transport, supply chains have a natural incentive to dollarize, the note added. Indeed, Mideast oil and gas is used to make petrochemicals, fertilizer, and even helium, which is critical to chipmaking.

“The world saves in dollars in large part because it pays in dollars,” Deutsche Bank said. “The dollar’s dominance in cross-border trade is arguably built on the petrodollar: globally traded oil is priced and invoiced in USD.”

In exchange for Saudi Arabia recycling its dollars back into the U.S., Washington guaranteed the kingdom’s security, which also involved stationing troops in the region, providing advanced weapons, and ensuring free navigation in the Strait of Hormuz.”

That security arrangement is currently under immense strain as Iran issues credible threats to destroy oil tankers passing through the Persian Gulf into the wider world, including to American allies in Asia that rely on imported oil, without express permission from Iran and tolls paid in Chinese yuan.

Continuing:

“While the U.S. and Israeli militaries have severely degraded Iran’s capabilities, the regime still retains enough to combat power to selectively close off the Strait of Hormuz—unless countries negotiate safe passage and pay in Chinese yuan…

But even before the Iran war, the petrodollar regime had come under pressure, Deutsche Bank noted. U.S. sanctions on oil from Russia and Iran created an illicit trade that relied on other currencies, like the yuan.

Saudi Arabia also joined mBridge project, a central bank digital currency initiative led by China that takes on the dollar-payment infrastructure.

“The current conflict may expose further fault lines, by challenging the US security umbrella for Gulf infrastructure and the maritime security for global trade in oil,” analysts warned.“

Predictions of doom for the dollar have proven overblown in the past, but the current situation lends more credibility to the CCP’s “petroyuan” project designed to usurp the dollar as the preferred currency for global oil trade.

Via Wikipedia (emphasis added):

“Petroyuan is a form of the official Chinese currency, the yuan intended at least initially for oil trading. On 26 March 2018, the Chinese government issued the first long term oil trading contracts denominated in petroyuans. This project exists to attempt to compete with the U.S. petrodollar as a main currency in crude oil transactions, whose hegemony has led the market since the dollar standard was first established in 1971, replacing the gold standard and giving the United States the power to manage most of the world’s currency supply (around ~60%).”

In summary, the two-fold implications of a closed Strait of Hormuz (maybe there are more, but these are the main ones) are:

· The toll extorted from oil tankers passing through the strait is all denominated in yuan, which undercuts the petrodollar

· International faith in the U.S. to uphold its end of the bargain — security in the Persian Gulf — is seriously compromised if it can’t keep the strait open, or more importantly can’t be seen to exert the military power to keep it open, in the long term

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In the wake of the current war, central banks across the globe have sold off their U.S. Treasury holdings at record clips, ostensibly in order to prop up their own currencies but perhaps — and this is only speculation — in anticipation of a future long-term decline in dollar value.

Via Financial Times:

“Foreign central banks have slashed their holdings of Treasuries at the New York Federal Reserve to the lowest level since 2012, as countries sell the US government bonds to prop up their economies and currencies in the wake of the Iran war.

The value of Treasuries held in custody at the New York Fed by official institutions — a group that is largely made up of central banks but also includes governments and international institutions — has dropped by $82bn since February 25 to $2.7tn, according to Fed data.

The decline in these holdings since the war began a month ago highlights how the surge in energy prices triggered by Iran’s closure of the Strait of Hormuz, a vital waterway, has upended the finances of countries that rely on oil imports, as well as boosting the dollar across the board.”

Did anyone in the State Department or Pentagon seriously consider all the above before launching the war?

It strains credulity that they wouldn’t have, given that the closure of the Strait of Hormuz and the ensuing disastrous geopolitical and economic fallout has been discussed in the context of a war on Iran for decades upon decades.

So, if you assume they did, why wasn’t there apparently any plan to force the strait open and keep it open from the start, which would seem to be the number one imperative from a national security perspective?

Benjamin Bartee, author of Broken English Teacher: Notes From Exile (now available in paperback), is an independent Bangkok-based American journalist with opposable thumbs.

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