Is China oil trade move a real threat to the US economy?

Oil rig in China seaSomething momentous happened within the global economy on the 6 September this year, but no-one seems to have noticed.

According to various websites and influential bloggers, there may be a conspiracy of silence or everyone was too busy watching something else.

In fact on that day, former US president Bill Clinton was giving a polished and rabble-rousing speech to the US Democratic convention endorsing President Obama's re-election hopes.

However in China, an announcement was issued stating that the country had made the decision to trade oil, not in US dollars, but in its own currency, the Yuan. This decision broke a historical precedence that has kept the US economy the most powerful global force, and an agreement with the House of Saud and the Middle East oil dynasties which always seemed unbreakable.

According to BP's Statistical Review of World Energy, the US and China are the world's biggest oil-consuming countries, accounting for a combined 32% of world demand. This compares to the 16% of global oil usage of the combined 27 members of the EU in 2011. China's growing consumerism is not unlike post-war America where a rising middle class is taking to the roads - demand for oil should keep rising after another 18m cars speed up and down the Chinese highways from new sales this year.

However in August, Chinese oil demand fell 1.5%, which was the second monthly contraction during 2012, commodities research agency Platts said. "There is still an argument to be made that government incentives for growth are going to kick-in and we'll see a rise in China's consumption in the remaining months of the year," said Song Yen Ling, Platts Chinese analyst.

China's National Development and Reform Commission also raised petrol's retail price by 6.6% and diesel by 7.2% on September 11 – the second hike in two months and the fourth so far this year.

Throughout the year China has been asserting its dominance by pushing the Yuan forward as an alternative to the US dollar. Its ramifications in the UK will hinge on Chancellor George Osborne's deal with the Chinese government allowing London to become the new gateway hub for the superpower to trade its currency in Europe over the next decade. Even this week the nation's currency hit its highest level since 1993, reaching 6.28 Yuan per US dollar, based on predicted government stimulus measures.

But the petrodollar wars seem to lie in the geopolitical battleground of the Middle East and in particular Iran. China began buying crude oil from Iran in May this year, using the Yuan to bypass the US sanctions. These sanctions have made it hard for the Iranian authorities to take payments in US dollars, and calls by the US for China to join in the international boycott has fallen on deaf years. Shortly afterwards the US granted a six month reprieve to both China and Singapore because they promised to cut Iranian oil imports.

Song also points out the Yuan has been used in some oil-for-loans deals that involve the China Development Bank. She says: "In Venezuela for example, in return for crude oil and/or products, some portions of the payment for oil are disbursed from the CDB directly to Chinese local companies that are contracted to do infrastructure work in Venezuela."

By 2020, China will have surpassed the US as the global number one, economy according to Standard Chartered Bank, amassing a GDP of $24.6 trillion up from $5.7 trillion in 2010. China, Russia and the Mercosur nations in South America are creating their own power axis, which could slowly undermine the US dominance further. US GDP will be slightly lower at $23.3 trillion by 2020 but the pressure is on the next President to tackle the deficit and decide whether the US manoeuvres the dollar towards the East or just stays in the Middle East.
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