Could the end of the petrodollar be in sight?
Moves by China to set up its own crude futures contract and invest in Saudi Arabian Oil Co., or Saudi Aramco, are leading some to think so.
Beijing will compel the Saudis to trade oil in yuan, CNBC quoted High Frequency Economics founder Carl Weinberg as saying last week. Crude contracts being set up by the Shanghai Futures Exchange will be convertible into gold, threatening to bypass the dollar altogether, the Nikkei Asian Review wrote last month. With state-owned oil giants PetroChina Co. and Sinopec offering to buy the entire stake that Saudi Aramco is looking to bring to the market, according to a Reuters report Tuesday, can the end of dollar-priced oil be far behind?
Not so fast.
For all that a blow to the status of the dollar might deliver a nationalist fillip to President Xi Jinping in the week of the Communist Party congress, China has far more to gain than lose from sticking with the status quo. And the nation doesn't have nearly the influence in the oil market needed to carry out such a coup.
In contrast to metals markets, where it accounts for almost half of global consumption, China is just one player among many in crude. Its consumption of 579 million metric tons in 2016 trailed the European Union's 613 million tons and was well behind the 863 million tons in the U.S., according to BP Plc's latest statistical review of the global market, which gave China a share of about 13 percent.
It's the same situation in trade. For the past decade, Europe has been the world's biggest oil-importing region, taking in 4.5 million barrels a day more crude than the U.S. in 2015 -- yet the euro is nowhere close to supplanting the greenback as a medium of exchange.
More importantly, consider the mechanics of the thing. Regardless of the technical specifications of Shanghai's planned crude contracts, traders outside China are going to be extremely reluctant to do a large share of their business in a country with a closed capital account. That's likely to keep liquidity lower on any Chinese contracts than they'd be on those traded overseas.
Look, for instance, at the most-traded product on the Dalian Commodity Exchange in China, iron ore. While mainland commodity markets have seen febrile activity in recent years, bid-ask spreads are still several times higher than those on major contracts traded in London and New York. That makes trading more costly, volatility higher, and price discovery weaker -- and as a major consumer of crude, Beijing ought to be opposed to that sort of change.
There are the producers to consider, too. Most of the Middle East's oil exporters have currencies that are pegged to the greenback. Switching to yuan pricing would introduce foreign-exchange risk to their budgets for little obvious gain, especially as China generally consumes less than 20 percent of their exports.
That doesn't mean the planned contract is useless. China will benefit from having a benchmark that's more appropriate for its own purposes -- particularly one that reflects the medium sour grades of crude that are chiefly consumed by local refineries, as opposed to the sweet, light varieties that underpin the main Western contracts.
Just don't expect it to change the world. While the economic center of gravity has been moving east, oil's connections to West Texas and the North Sea will remain strong for years to come.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
As defined by BP's statistical review, this includes the euro region as well as countries that use their own currencies.
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