By Sonny Atumah
English theologian, John Henry Newman (1801–1890) at the Oxford University Sermons on Faith and Reason, Contrasted as Habits of the Mind said that: “When men understand what each other means, they see, for the most part, that controversy is either superfluous or hopeless.”
Civilization connotes advanced level of development in society, marked by complex social and political organization, material, scientific, and artistic progress.
Nations in many world civilizations have tended to exert supremacy over one another. The cold war period from 1948 to 1989, was a hostile yet nonviolent relation between the former Soviet Union and the United States and their respective allies. The United States emerged a super power with greater political, economic and military power after the collapse of the Soviet Union.
It appears the United States supremacy in political economy is being challenged. A trade war is concocting ominously between the United States and China on that hegemony. Some believe that oil being traded in the United States dollars gives the American economy a unique advantage in the global economy. On March 26, 2018, China’s Securities and Regulatory Commission commenced crude oil futures contracts in Shanghai 1.
It meant China buys oil with her currency, the Yuan that is converted into gold without turning it into the American dollars. China’s plan in the trade war is to purchase her exports in Yuan or the renminbi (RMB), its national currency as a way of making it a reserve currency, thereby making it less dependent on the United States dollar.
Would the Chinese challenge in a new bench mark of petroyuan for crude oil purchase gain ground like the petrodollars wildfire that started in 1974? The petrodollar came to prevent America trade deficits from rising in the wake of oil prices increases as it became a net importer of oil in the early 1970s. President Richard Nixon and the Saudi authorities’ deal of 1974 created what was referred to as petrodollars.
It was for Saudi Arabia and other Middle East oil suppliers to accept the dollar for crude oil sales in exchange for military equipment and aid.
The petro-dollar had played a tremendous role in assisting the United States deficit financing. With the petrodollars, the United States becoming a safe haven for the oil rich states to store their oil revenues as well as invest into United States treasuries. The petrodollar recycling encouraged the purchase of oil in dollars thereby creating a huge demand for the dollar as international currency.
China, the second largest economy in the world which has overtaken the United States as the world’s largest oil importer may be the other side of the coin in crude oil trade. China’s President Xi Jinping is leveraging on his relations with major crude oil exporters in the Middle East to strike deals with oil exporters to put the Yuan in the slot of crude trade especially as their (Middle East) market share of crude oil fall to American shale oil.
In March, the Central Bank of China’s Governor met the Saudi Finance Minister, to discuss the proposal on when Saudi Arabia may start to accept Yuan for oil sales to China. For now, Saudi Arabia remains firmly committed to the dollar as the medium of payment for its crude export. As a primary source of investment capital for oil-producing nations, China would greatly benefit from using its own currency over that of the United States.
The question is whether the Pax Americana is going down. Analysts believe the dollar is too strong thus making domestic crude oil production expensive for producers to break even. With no transatlantic pipelines relying on tankers make crude imports expensive. But the dollar would continue to be traded with because it is liquid and a reliable global exchange medium. Again, the American economy is believed to be open and quite innovative. China’s One Belt One Road project is to create trade networks across Europe and Asia including the Middle East to make the Yuan an international currency. Volatility and steep price rises have caused China to intervene with tighter trading rules that have elicited comments against China in the global economic system.
Watchers believe that in the last few years Chinese authorities have gradually loosened capital controls, allowing the Yuan to become the fifth most popular currency for settling global payments. Since 2016, the Yuan has been part of the International Monetary Fund’s Special Drawing Rights, SDR basket. For a country’s currency to be in the SDR basket its currency should be freely usable, and should have a large export base.
The SDR was introduced in 1969 after the collapse of the London Gold Pool with the dollar, euro, pound sterling and the Japanese yen used for international trade and for national foreign exchange reserves. There are over 60 central banks that have included the Yuan in their foreign reserves. For now, paying for oil in dollars cannot be uprooted. But the dollar as the global reserve currency has been underwritten by Chinese economic policy that has built up a pile of dollar-denominated reserves.