China May Be Using Aramco IPO To Promote Petroyuan

Photo: China May Be Using Aramco IPO To Promote Petroyuan

There has been talk of the of the US Dollar's (USD's) impending demise for years. It is easy to cite any number of reasons why the USD is on its last legs, but to date, it is still the most used currency around the world. One of the biggest reasons why the USD is so popular is probably because it is still the currency of choice in the commodities market, where most of the major exchanges require the USD for trading.

But the USD standard seems to be under increasing pressure, and as China grows more powerful, they appear to be working to unseat the USD. China recently overtook the US as the largest importer of oil, and if the Chinese Yuan was allowed to appreciate, China's GDP could overtake the US as the largest economy in the world. As it stands today China is still number two, but when we look deeper at what China uses its energy and materials for, it is easy to see why they are looking to secure supplies of vital commodities.

Unlike China's diverse economy, Saudi Arabia is highly focused on oil production. There are few industries that contribute much to the Saudi coffers, and they are beginning to focus on a world where oil may not play the role it currently does. While we may be at the beginning of the end for easy oil, the world at large is moving away from the internal combustion engine at a rate previously thought impossible. If China goes through with its plan to outlaw petrol diver autos over the next decade, the role oil would play in the world's most populous nation would shift radically.

Now Is The Time

Saudi Arabia is dealing with some hard decisions at the moment. The oil mega-producer's government is reliant on a complex system of social assistance that pacifies their population. The problem is: their money is running thin. Despite having a huge tax revenue to play with from Saudi Aramco, the desert nation is struggling to pay for all the social programs in the kingdom. The new prince has announced a series of reforms that are designed to create economic development outside of the oil patch, but he still needs money to pay for the changes.

Enter the IPO of Saudi Aramco, which is in the process of listing around 5% of the company on one of the major public stock exchanges. Saudi Arabia is said to be considering New York, London and Hong Kong for the listing of the shares, but whatever direction they take, there will be political consequences. Saudi Arabia created a massive advantage for the United States when they agreed to sell their oil exclusively in USD's, but today this decades old arrangement may be giving way.

Both Sinopec and PetroChina have approached Saudi Arabia with the intent of buying the entire 5% float of Aramco, or perhaps more, if possible. This puts Saudi Arabia in a very difficult position, as they are being forced to choose between maintaining relations with Washington, or pivoting to Beijing in a big way. The underlying question becomes one of reserve currencies, and the disruption a substantial move away from the USD would likely create.

Solid Moves

With China's increasingly bold moves to promote the Yuan as in international settlement currency, it will only be a matter of time before the USD is eclipsed. How this move will play out is anyone's guess, but the USD probably isn't going to gain value in the balance. Investors like Doug Casey and Jim Rickards have been making money in rough markets for a long time, and if you want to get their views on where the economy might land, the upcoming Silver and Gold Summit is the perfect place to connect with them.

In addition to Doug Casey and Jim Rickards, a number of other prominent investors and CEO's will be presenting their ideas, and participating in panel discussions that are sure to be fun, and informative. The two day event begins on November 20th, and will be happening in the heart of downtown San Francisco. We are looking forward to all the great ideas, and hope that you will join us!