Damian White
Sr. Precious Metals Advisor
Damian White is a Sr. Precious Metals Advisor at Scottsdale Bullion & Coin. With a background in business and finance, he transitioned from real estate finance to focus on precious metals in 2016. Damian is dedicated to educating investors on the benefits of gold and silver, emphasizing the importance of wealth preservation and proper asset allocation.
The unfolding economic war between the US as the world’s sole superpower and China as its fastest-growing challenger hinges on a single battle: the petroyuan vs. petrodollar. For nearly half a century, the petrodollar system has upheld the dollar’s dominance as the singular world reserve currency in lieu of the gold standard.
However, in the past few years, a convergence of domestic and foreign pressures has tipped the US dollar into a downward spiral, and China is taking advantage of every weakness to position its currency as the foundation of the world’s economic future. Will the yuan replace the dollar or will the status quo prevail?
Petroyuan vs. Petrodollar: Differences and Similarities
Structurally, there’s no difference between the petroyuan and petrodollar systems. Both the petroyuan and petrodollar are currencies exclusively used to settle cross-border oil transactions, even between foreign countries. The key difference is that the petrodollar is more entrenched although the petroyuan is quickly gaining traction as a potential rival.
The petrodollar system arose in the mid-1970s when President Nixon convinced Saudi Arabia and, eventually, all OPEC nations to price their oil exports in USD in exchange for military and economic support. This meant every country had to convert their currencies into USD for cross-border oil transactions which propped up the dollar as the world reserve currency. In effect, petroleum replaced gold as the backing of the dollar.
For over 50 years, the petrodollar system remained unchallenged until America’s primary economic competition decided to steal the move out of its playbook. In 2018, China launched crude oil futures contracts denominated in yuan. This decision effectively launched the petroyuan onto the world stage, and the CCP has been making a concerted effort to supplant the petrodollar ever since. The end goal is to have the petroyuan system be the de facto foundation of the world economy to further China’s geopolitical and economic goals.
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Get Report – It’s Free!“China…wants the Yuan to be broken free of the dollar.”– Precious Metals Advisor John Karow
How is the petroyuan fighting the petrodollar system?
The dollar might still comprise the majority of oil transactions, but China has won some decisive victories in the petroyuan vs. petrodollar showdown.
BRICS’ size and influence are growing.
The BRICS block – consisting of Brazil, Russia, India, China, and South Africa – is advertised as a collection of emerging markets promoting the economic well-being of all nations on equal footing. However, with a GDP double the size of the combined output of other members, China wields decisive influence in the group. This leads many to suspect the CCP is only using BRICS as a means to further its aim of establishing the petroyuan system. The potential development of a BRICS currency and the most recent BRICS expansion are two major victories in that pursuit. Plus, this rapidly growing powerhouse already outperforms the G7 in terms of GDP – the BRICS’ Western counterpart – underscoring America’s waning economic influence.
Use of the petroyuan is increasing.
The petrodollar system relies entirely on the cooperation of oil-producing nations to price their petroleum exports in USD. China is successfully chipping away at US-Middle East relations and building closer alliances with oil-rich countries to encourage the use of the petroyuan instead of the petrodollar. Several countries including Russia, Indonesia, Iraq, Venezuela, Iran, and the United Arab Emirates already accept the petroyuan with Russia accounting for an outsized proportion of trade. Saudi Arabia, the jewel in the petrodollar crown, has even discussed the possibility of accepting the petroyuan with President Xi Jinping. The successful admission of the Kingdom into the BRICS block is seen as a decisive blow to US-Saudi relations.
Yuan foreign reserve growth is outpacing USD.
The widespread use of Chinese or US currency is fuel to either side in the petroyuan vs. petrodollar fight. Although the dollar still far outperforms the yuan in regard to the percentage of international reserves, the yuan is growing quickly. The same can’t be said about the dollar which is actually shrinking. In 2021, USD’s share of global foreign reserves hit a 25-year low on the back of the rapid acceleration of de-dollarization. In contrast, the yuan has gone from a virtually unused currency to the third most commonly used currency for foreign exchange reserves within just a few decades. Currently, the yuan outperforms the Japanese yen and British pound.
The CIPS System is seeing increased use.
The Cross-Border Interbank Payment System (CIPS) was created by China to rival the Western-led and primarily US-denominated SWIFT system. Although the SWIFT version remains the preeminent payment system for cross-border transactions, the CIPS system has seen a spike in use recently. American adversaries such as Russia and China flock to the system to bypass sanctions implemented through the SWIFT System. However, other countries seek out the alternative to simply avoid having to convert their money into USD before making transactions. These developments advance China’s potential victory in the petroyuan vs. petrodollar battle which could ultimately determine the shape of the world’s economic and geopolitical order for decades to come.
Will the yuan replace the dollar?
There’s no way to predict the outcome of the currency struggle. However, there are a few certainties: the world has never been more motivated to pursue an alternative to the dollar, the petrodollar system has never been weaker, and the petroyuan system has never been more attractive. These realities seem to tilt the petroyuan vs. petrodollar competition in favor of China.
The world economy has only ever transitioned between world reserve currencies one time. This occurred in the aftermath of consecutive World Wars when the crumbling British pound sterling gave way to the rising US dollar. This historic transition saw a massive rise in US dominance and economic might and a comparative diminution of British influence and wealth. It’s safe to assume the US would suffer the same fate if China were to win the petroyuan vs. petrodollar contest.
Gold is the Real Winner
The overarching takeaway from this ongoing economic struggle is that a world economy based solely on fiat currency is unpredictable, volatile, and unstable. No matter which currency prevails, its reign will only be temporary. That’s why smart money has been hedging against uncertainty by shoring up its wealth with physical gold assets including gold bars, bullion, and coins. In fact, central banks have been scooping up gold at a record pace, highlighting the world’s growing distrust in the dominant fiat system.
The more tumultuous the petroyuan vs. petrodollar struggle grows, the higher the gold demand will rise. As the pervasive law of supply and demand requires, this will inevitably lead to a jump in gold prices. In other words, no matter the outcome of this currency clash, gold is going to be the real winner.
Stay Up to Date to Stay Protected
You shouldn’t wait until the petroyuan vs. petrodollar competition is resolved to make investment decisions. Right now is the time to act to protect your wealth from the predictable instability on the horizon. The shifting tides of global currencies bring both risks and opportunities.
Staying up to date on the latest events in this ongoing sage is the best way to avoid the pitfalls and reap the rewards. To help keep investors informed, we’ve put together a comprehensive FREE Petrodollar Report covering the key events in the petrodollar’s decline and the petroyuan’s growth. Request your FREE COPY of the Petrodollar Report today!