Fight for global oil market

Till 1974, the reputation of United States Dollar as a global currency was not so established. It was considered at par with Japanese Yen and Pound Sterling. However, an oil pact between Saudi Arabia and the US changed the entire scenario and made US Dollar the most dominating world currency as on date.

Today, out of over 700 billion Dollar of global oil trade, more than 95 per cent happens in US Dollar and every country desirous of buying oil from its producers, such as ex-Russian Federation countries, Middle East or Latin America must first accumulate its dollars. 

China has strong reasons to start this initiative as they import over 18 per cent of the world oil and, in the last one decade itself, their crude oil requirements have risen by more than 235 per cent. In 2010, China used to import little less than 4 million barrels of crude oil a day which is now touching over 9.5 million barrels per day, currently the highest in the world. This trend is likely to continue as China is primarily a manufacturing-based economy and crude oil is an essential item for them.

As per recent reports, China is planning to cover its future oil contracts under “Shanghai International Energy Exchange Program” and going to launch it on March 26, 2018. The “Shanghai International Energy Exchange Program” is named by its acronym INE and will include seven kinds of global crude oils. These are primarily from the Middle East and almost all Chinese companies are expected to use INE for their purchase of oil from that region. 

It will help Chinese buyers to lock the future oil prices and pay in their local currency, giving an answer to Uncle Sam by pitching of Petro-Yuan against Petro-Dollar. The most important part of the Chinese strategy is that they have located this “Shanghai International Energy Exchange Program” in their Free Trade Zone which will facilitate foreign traders also to invest. 

It did not come suddenly but China had been preparing for it for long. Recently, some of the global economies decided to keep Chinese Yuan in their foreign currency stockpile after IMF decided to designate Chinese Yuan as a global currency in 2015. The main agencies which are keeping Renminbi as forex reserve are Deutsche Bundesbank, the German Central Bank, European Central Bank (ECB) and International Monetary Fund (IMF) too. And recently our neighbour Pakistan also decided to make Yuan as a primary Foreign currency. But China has a long way to go. Currently, the share of Renminbi in the global forex reserves is just 1.08 per cent with US Dollar dominating at 63.5 per cent of all reserves. Euro is next with 20 per cent.

So, what is the Chinese stake in this? They have a long and ambitious plan for this. Let’s see how China expects to be benefitted out of this:

Firstly, to dominate global oil market, China would promote its currency in global oil trade. Secondly, since it will involve future price trading and benchmarking, it will protect them from higher price surges and they will be able to affect global oil prices in the long term. As oil prices are rising once again, the biggest importer of oil will have the future assurance of prices. 

Thirdly, many Chinese industries are using a different kind of crude grades for their various applications. And, since, they are having different pricing for these types of crudes they can effectively benchmark the same in the international market and, hence, get benefitted.

China was ready to launch their INE or “Shanghai International Energy Exchange Program” in 2016 itself but the sudden dip in global oil prices forced them to postpone this move and wait for a right opportunity. With the improvement in global oil index, they are ready to start it. 

So, who will participate in this programme and make it a success? 

• As mentioned earlier, China already has a sizeable share of global trade, including that with the oil-producing nations. China will try to replicate some of it in its energy exchange. 
   
• Also, there are many countries like Pakistan who do import oil and are under the influence of China. They will certainly form part of the future trade in INE. Though the value will be small, it will give a push to the program. 
   
• Chinese ‘Belt and Road Initiative” is aimed at connecting countries to create a Eurasian Trade corridor. Some of these countries, especially erstwhile Russian Federation, are producers and exporters of crude too. They are likely to join INE to form a syndicate against the global monopoly of US Dollar. Russia has already started by selling some part of its oil to China against Renminbi. 
   
• For Middle Eastern countries who are still the biggest producers of oil, the risks caused by the dominance of United States will reduce. This resulted in the fall of global oil prices in the last few years. 
   
• Global oil traders see China as the fastest growing market for their oil products. 

The global oil market is controlled by the Middle Eastern countries and their reliance on the United States are much higher than China. Since the number of countries is small, the risks involving the prices are high and, last but not the least, breaking the monopoly of US Dollar is extremely difficult, especially where such unpredictable commodity is involved.

The author is a veteran from an elite unit of Armed Forces, having keen interest in defence, internal security, strategy and international relations