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From PetroDollar To PetroYuan – The Coming Proxy Wars

From PetroDollar To PetroYuan – The Coming Proxy Wars thumbnail

Why would the central bank of Nigeria decide to sell dollars and buy Yuan?

At first glance it might not seem the most interesting or pressing question for you to consider. But I think it is one of those little loose threads that if pulled upon carefully begins to unravel the hints and traces of a much larger story. But please be warned this is speculative.

Two days ago the Nigerian Central Bank announced it was going to increase the share of its foreign currency reserves held in Yuan from 2% at present, to up to 7%. To do this it was going to sell US Dollars. Now a 5% swing in anything financial is big. In our debt drunk times it’s difficult somethimes to remember that 2.15 billion dollars (which is what 5% comes to) is actually a great deal of money, even if it is less than a drop in America’s multi trillion dollar debt ocean. On the other hand even a 5% increase in Yuan would still leave 80% of Nigeria’s $43 billion worth of reserves in dollars.

BUT while it is small in raw financial terms I think it is significant in geopolitical terms.

Nigeria is Africa’s second largest oil and gas exporter. It holds as many dollars as it does because oil is sold in dollars. Nigeria gets paid in dollars which it then needs to recycle. This is the famous petrodollar in action. It is also a major reason the dollar is still the world’s major reserve currency and that in turn is why America can have such a monumental pile of debt and still (for now) be the  risk-off haven that institutional  investors run to when other currencies and markets become too risky and unstable.

What interest me is that prior to this announcement from Nigeria’s central bank, China has, for some years now, been working hard and succesully to buy exploitation rights in Nigeria’s oil fields. In 2009 The Wall Street Journal reported,

 Chinese companies have proposed investing $50 billion to buy 6 billion barrels of oil reserves in Nigeria, the African nation’s presidential adviser on energy said Tuesday.

A year later in 2010 the WSJ reported,

Nigeria and China have signed a tentative deal to build three oil refineries in the West African state at a cost of $23 billion, in a move to boost badly needed gasoline supply in Nigeria and to position China for more access to the country’s coveted high-quality oil reserves.

And just last year China extended a $1.1 billion loan in return for a reported agreement that oil exports to China would increase from around 20 000 barrels a day to 200 000 per day by 2015. This loan was on top of a range of development agreements betwen the two countries for various infrasctructure projects such a telecoms and railways.

Nigeria had, as of 2011, over 37 billion barrels of proven oil reserves. China is now one of its major trading partners. China wants Nigerian oil and my guess is that if it isn’t doing so already it is going to trade it entirely in Yuan. Such a move would mean Nigeria would need fewer dollars and more Yuan and the PetroYuan would begin to rise at the expense of the Petrodollar.

For some years now China has been making the Yuan a settlement currency. I have written about this a lot over the years. In 2012 I wrote a piece called “A new reserve currency to challenge the dollar – What’s really going on in the Straits of Hormuz.” China has created a series of bilateral settlement agreements with, among others, the EU, South Korea, Iran, India and Russia. All of these agreements by-pass the US dollar. If China now trades its oil in Yuan where will that leave the dollar?  Of course Saudi would never agree to such a thing, would it?

Now Its a long way from Nigeria’s 200 000 barerels a day to overthrowing the dollar as the premiere oil currency. But let’s face it the US has gone to war on more than one occasion recently in part because the country involved had been going to sell its oil in Euros. And the US is Europe’s friend, isn’t it?

The US hawks have always been afflicted with dominophobia – fear of falling dominoes. Somewhere in a room in the Pentagon or Langley, there is a huddle of spooks, military types, oil men and State department advisors all wondering how to prevent this new creeping menace. Because you cannot afford to be complacent you know. It starts in one country and if you don’t do something other’s will follow and before you know it the rich Western Africa oil bonanza is flowing into Yuan, to be followed by all those North African and Middle Eastern Arab Spring countries where the clean-cut boys are already having to ‘advise’ on the need to take a firm line with potentially anti-American Muslim Brotherhood types by  locking them up, shooting them and generally branding them as terrorists.

What would happen, someone will mention almost in a whisper, if Qatar were to triumph over Saudi and then cut a multi-lateral deal to sell its gas in Euros to Europe and in Yuan to China?

But to return from the overheated imaginations of the Virginia Hawks to some sort of reality, Nigeria is increasing its Yuan reserve at the expense of the dollar and is developing far closer ties to China than to the US. Which is why I think you will soon find the US dramatically increasing its involvement, both financial and military, in Angola.

Angola is going to be America’s answer to China’s Nigeria. And I think the signs are already there.

While in Nigeria Chinese companies are expanding, in Angola the big players are the Western Oil majors: Chevron/Texaco(US), Exxonmobil (US), BP (UK), ENI (Italy), Total (FR), Maersk (DK) and Statoil (NOR). There are others but these are the big players. Of these Total is probably the largest presence producing about a third of all Angola’s oil output. And Total has recently increased its presence. Of the others Chevron is one of the largest and is expanding aggressively.

Angola itself is busy selling off new concessions. 10 new blocks containing an estimated 7 billion barrels of oil, which is over half of all Angola’s proven reserves  are to be auctioned this year. Angola has recently edged ahead of Nigeria to be Africa’s largest oil exporter. If I’m correct I expect the Western nations/companies, led by the US and new best war-buddy, France to make sure the Chinese do not get a large share of the spoils.  One to watch.

As part of this new Western push, I expect to see China also restricted in any new oil fields around Sao Tome and Principe.  The big players to date are Chervon, Exxonmobil and Nigeria. The latter suggesting a way in for the Chinese that I think the Westerners will want to push shut.  To which end what I found interesting about recent events in Soa Tome and Principe is the visit there of Isabel dos Santos, the daughter of Angola’s President for life. I have written about her and her banking empire in The Eurofiscal Corruption Contest – The Portuguese entry.  Isobel is most often refered to as Africa’s or Angola’s most famous business woman or Africa’s richest woman (She’s a billionaire). Rarely does anyone from the press raise the question of how she became so vastly wealthy.

She made a visit to the islands and both she and Angola’s state companies have begun to invest heavily. Angolan companies now have a very commanding position in the island’s economy and Angola, even though its own people live in poverty, found the money to loan Sao Tome and Principe  $180 million which is half of the island’s GDP. Top that Beijing! The Islands are Portuguese speaking, the largest bank is Portuguese, and the islands also house a broadcast station for Voice of America.

I think taken together the signs are that the West, led by America, has in mind to try to contain or perhaps even confront Chinese expansion particularly as it concerns access to oil and gas in West and North Africa, and to rare earth minerals – but that’s another story. I don’t think there can be any doubt that America and Europe are looking at Chinese expansion and its hunger for resources and see a threat. The question is what will they do?  America is accustomed to being the hegemonic power and its hawks have proved over and over that they are are quite prepared for military confrontation. The question for them would be how? Invading countries who have – in reality – very little military or economic might is one thing, but directly confronting another superpower is another.  I think all sides would see direct and open military confrontation to be out of the question. Not just for military reasons but for global economic ones as well. They need to find ways of fighting that do not sink the world economy  – neither its flows of goods and trade , nor its flows of captail and debt. Which is why I wonder about the possibility of seeing an era of new proxy wars being faught out in tit-for-tat destabilization escalating up to protracted gorilla/civil wars.

In West Africa the  front line seems to run between Angola and Nigeria.  So who would like to play a game of destabilize your neighbour? There is already unrest about Chinese goods flooding Nigeria. How tempting might it be to think about fanning flames of unrest in already unstable Nigeria espeicially in the delta?

In return what would you have to do to re-ignite the lines of mistrust and division which blighted Angola through decades of civil war? Dos Santos and the MPLA may have been the Soviet proxy but he’s a capitalist now. So, how about a nice cold-war style proxy war?  I cannot bring myself to believe that no one at the Pentagon has dusted off the old plans for such conflict and set some analysts to working up some new ones with China scribbled in, in place of Russia.

Something is, I suspect, already afoot. One last pull on that little thread, one last detail that makes me wonder. Just last April (2013) the Israeli billionaire, Dan Gertler sold back to the government of the Democratic Republic of Congo, one of the  oil companies/exploration blocks he had bought from it, but for 300% more than he paid. Anti-corruption campaigners have been up in arms.

Two facts interest me . One, that the purchase was actually financed by Sanangol, the Angolan state oil company (the company from which $32 billion had gone missing. Missing billions: billionaire dos Santos… No connection obviously). The DRC is to pay Sanangol back from oil revenue. Until that time, of course, Sanangol calls the tune.  Two, that this oil block lies between the DRC and Angola in what was contested territory but has since been decreed a zone of cooperation.

Now this sale by Gertler could just be a bog standard pillage-Africa deal. And I might well be seeing things that just aren’t there, but why now? This sort of big money, that is connected to the top of the DRC government (how do you think Gertler was able to buy the concession at the price he did? And who do you think might be the, so far, hidden second beneficiary of Gertler’s oil company? The government minister who sold the concession to him in the first place,  maybe?) moves when its contacts suggest this is a better time to lock in profit than times to come.

All in all, if I were a religious man, I would be saying a prayer for the children of Nigeria and Angola.

A note on all this speculation and non-financial stuff.  I don’t usually write this much speculation but recently I have become more convinced that we are in a watershed in which everything around us, all the rules we are used to, all the lines on the map, are up for grabs and are changing around us. For me, finance is not separate from politics so we have to understand how they rub against one another.  I hope you will bear with me.

Golem XIV Thoughts blog

15 Comments on "From PetroDollar To PetroYuan – The Coming Proxy Wars"

  1. Davy, Hermann, MO on Sat, 1st Feb 2014 1:51 pm 

    If you follow Zero Hedge you will see the financial mess China is in. If you follow most mainstream media outlets you have heard about their dangerous air and water pollution. China is an integral part of the global economy. The US and China economies cannot be separated. They are codependent just as the rest of the world is dependent on the rest. We can lose some minor players and still keep the system humming. What we cannot manage is either of these economies crashing. The stability of the world financial system should move away from one dominant reserve currency. There is a big debate on how to do this. Most likely it will be a currency basket with China an important part of this. The problem is getting from here to there. Neither China nor let’s say Europe are structurally prepared currently for this kind of move. We are stuck with the dollar for a time. China is amassing gold as we read but gold is not the complete answer either. It is further not certain our fragile global financial system can make a transition to something new without first an implosion. Multiple tipping points are present in the global financial system that may end up tipping us into the “big one”. In the mean time we as a global economy will limp along and muddle through.

  2. eugene on Sat, 1st Feb 2014 2:45 pm 

    I keep remembering China has been around and learning for 2000 yrs. The US is a child in comparison and spends far too much time acting like one. As far as Zero Hedge, like many other “financial” websites, they are always predicting one thing or another. Long ago, I learned the US is a great deal of BS propaganda and to wait for the future to unwind the reality. Most of all, economics is far, far from a science. As far as I’m concerned it’s, maybe, one step from a Gypsy’s crystal ball.

  3. Northwest Resident on Sat, 1st Feb 2014 3:41 pm 

    Davy – IMO, you are one hundred percent correct when you mention that US and China cannot be separated. China produces massive amounts of cheap stuff with their cheap labor — America and the rest of the world buy that cheap stuff, but mostly America. Without America as a #1 importer of all their cheap stuff, who are the Chinese going to sell to? And your other point, that China is a financial mess, is also undeniable. Of course we can’t believe everything we read on Zero Hedge, just like we most definitely do not believe everything we read on peakoil. But it isn’t just the Zero Hedge articles clearly describing what a disaster China is — confirming analyses come from plenty of other sources too. As far as I can tell, the websites trying to sell gold and silver are the ones pumping the “world currency is switching to Yuan” hype and I guess you can’t blame them, they’re just trying to make a few extra bucks while the gettin’ is good.

  4. Northwest Resident on Sat, 1st Feb 2014 3:55 pm 

    Speaking of ZeroHedge — here are some interesting (to me) quotes by posters on this same article over at ZeroHedge:

    In general, what is wrong with this article is the fundamental fact that Shell, Exxon and Chevron are all in Nigeria — and they can’t hold their production up. If there were huge oil opportunities in these “proven reserves”, those three would have been all over them 5-10 years ago as their internal corporate peaks were manifesting themselves.

    When you are inclined to think about things monetary, stop. Think instead about what oil-relevant reality is underneath whatever matter you are observing, because oil is all that matters.

    You’ll know it’s real when those dead prince Nigerian email scams are being denominated in yuan.

    Africa, the new middle east. The spies from the us and china are jockeying for position, and the loser is … Africa after multiple civil conflicts are started., and millions of poor people die. Business as usual.

    The dollar might suck. But the yuan is even worse. Out the frying pan and into the fire.

  5. Davy, Hermann, MO on Sat, 1st Feb 2014 4:09 pm 

    Northwest Resident on Sat, 1st Feb 2014 3:41 pm
    we can’t believe everything we read on Zero Hedge

    NR I agree @ Zero Hedge but I have found few other financial sites to follow. They are at least bearish in the midst of so much exuberance and optimism. They question the corruption, swindles, and Ponzi schemers. I follow Max Keiser also. The reason I am following theses financial websites is the likelihood the weakest link in the collapse chain will be the financial system.

    eugene on Sat, 1st Feb 2014 2:45 pm
    Most of all, economics is far, far from a science. As far as I’m concerned it’s, maybe, one step from a Gypsy’s crystal ball.

    Agreed Eugene, economics has become a false profit of the belief in the markets and our exceptionalism derived from knowledge and technology. The reason I follow economics is the banksters and politicians believe in it. We best know what the heathens are following so we can gauge a direction the falling house of cards will take.
    As for China their 2000 years of wonderful history and knowledge was thrown out the window when they embraced western ways. They are now the number one danger to the world ecosystem and ranked equal with the danger to the financial stability of the world with the US. Do not underestimate the Chinese danger. We all know the danger from the US. The US is the standard whipping boy here and on many other blogs. It is usually old stale news when I hear the US being whipped on. China is easing into many regions being welcomed because of why, well, money of course. China will find many of these deals they have arranged will backfire. Just as they have built ghost cities they are also doing fools deals.

  6. robertinget on Sat, 1st Feb 2014 4:11 pm 

    Agreeing with Eugene, may I comment further?

    Nigeria has bigger problems.
    Despite Nigeria’s vast NG surplus, most is flared. This:

    One might ask why the US has lost influence in Nigeria and Chinese interests are in picking up remnants?
    After forty years of dealing with corrupt Army and government officials
    US oil companies have done nothing to bring reliable electricity to Nigerians. The Chinese, being neither Christian OR Muslim are busy building visible public reminders of who they are compared to US oil companies.

    (BTW) The USD is higher in value today than years. The Chinese yuan, keyed to USD, move together more or less.

    Nigerian central bankers are simply hedging , nothing more. If one buys yuan with dollars, banks increase China’s USD holdings.

    This idea of a new “One World Currency”
    best remain on internet sites like this one for folks to argue about as they do.

    Thanks to increased US and Canadian (oil) production: this from WSJ

    Angola is depending increasingly on oil sales to China as its exports to the U.S. decline, according to the country’s oil minister, reflecting a shift in the global oil market as North America produces more of its own energy.

    “There is a reduction in petroleum imports to the United States,” petroleum minister Jose B. de Vasconcelos said in an interview. “Emerging markets India and China have been growing, and they have absorbed a large part of Angolan exports.”

    Angola’s oil exports to the U.S. fell 34% last year, according to data from the U.S. Energy Information Administration. Over a longer period, the West African nation has steadily increased its exports to China, according to data from the Organization of the Petroleum Exporting Countries, becoming the giant economy’s second-largest oil supplier after Saudi Arabia.

    Now, the West African nation isn’t alone among exporters looking for alternatives to the U.S., where demand for imported crude from overseas has fallen thanks in part to increasing auto efficiency, stepped-up domestic production and growing output in neighboring Canada. Nigeria, another big African exporter to the U.S., saw its U.S.-bound exports almost halved between 2011 and 2012, according to the U.S. Energy Information Administration.

  7. Davy, Hermann, MO on Sat, 1st Feb 2014 5:12 pm 

    robertinget on Sat, 1st Feb 2014 4:11 pm

    US oil companies have done nothing to bring reliable electricity to Nigerians

    Royal Dutch Shell is an Anglo–Dutch multinational oil and gas company and the biggest player there

    Good point on reduced exports to US and hedging this fall in exports

  8. J-Gav on Sat, 1st Feb 2014 5:27 pm 

    China’s massive shadow banking system and the billions upon billions of $ in crappy loans they’ve made over the years will come back to haunt them. No way is the yuan replacing the dollar. Which is not to say it couldn’t be part of some future basket of currencies, as mentioned above.

  9. Makati1 on Sun, 2nd Feb 2014 4:02 am 

    I read all of the put downs on China here and wonder how much is influenced by the current MSM China bashing. To say that China cannot or will not kill the US economy because they need to sell us their stuff is not realistic. The US is not their largest buyer. The EU is. The US currently buys less than 18% of China’s exports and the percentage is shrinking every year.

    See World War 1 ,the causes of, if you believe that economic ties really matter.

    Also, China is moving away from the US in every way possible. Another few years and they will not need the US at all, however, the US will need them. Do you realize that a war with China would end electronics in the US? There would be nothing coming out of Asia.

    So, bash China all you want but keep an open mind to the possibility that you are wrong.

  10. GregT on Sun, 2nd Feb 2014 7:19 am 


    Just the usual exceptionalism.

    It’s always easier to point fingers at others, than it is to take a long hard look at one’s self. China needs the US no more than a fish needs roller-skates, and China has been very clear that this is the case. The 3.5 trillion that they hold in US debt is not relevant to the Chinese. They are dumping it as fast as they can.

    The US’s massive shadow banking system and the trillions upon hundreds of trillions of $ in crappy loans they’ve made over the years will come back to haunt them. Much of the Chinese loans, have been for investments in resources, energy, land, and gold.

  11. Davy, Hermann, MO on Sun, 2nd Feb 2014 1:14 pm 

    Makati1 on Sun, 2nd Feb 2014 4:02 am
    Also, China is moving away from the US in every way possible. Another few years and they will not need the US at all, however, the US will need them. Do you realize that a war with China would end electronics in the US? There would be nothing coming out of Asia.

    Come on Makati do you really think this assumption is realistic? China is one of the US biggest grain export markets. China is already gone over their carrying capacity for food and water. The world is interconnected and china is no different. China and the US are the largest economies and you just don’t decouple that. It is no longer about China or the US anyway. It is about a global system of 1%ers, multi-nationals, and geopolitical blocks.

  12. Makati1 on Sun, 2nd Feb 2014 2:05 pm 

    Really Davy? They have been buying up farmland by the square mile in many countries these last few years. They don’t need the US.

    US farmland is drying up and blowing away, literally. Have you read about California this year? Most of the US fruits and veggies comes from the new desert state. And with frost and snow in Florida … lol. Not looking good in the US supermarkets if you are in the shrinking middle class.

  13. Davy, Hermann, MO on Sun, 2nd Feb 2014 3:00 pm 

    Makati1 on Sun, 2nd Feb 2014 2:05 pm
    Really Davy? They have been buying up farmland by the square mile in many countries these last few years. They don’t need the US.

    Google grain production in US. Check Chinese grain imports. Chinese don’t import our vegies. Their buying up of farm land world wide is insignificant. Places like Ethiopia and Kenya are not bread baskets. What do you think these population in these countries will do when they get hungry? Send their food to china? I guess China could always send their one aircraft carrier to enforce their contracts on these third world countries.
    Yes, California is in an epic drought but that just means no Caesar salad for you and no strawberries on your cheerios. This is not corn in the Midwest.

  14. J-Gav on Sun, 2nd Feb 2014 4:59 pm 

    GregT – True – and I’m certainly not saying the U.S. has in any way provided a viable model for financial stewardship (the $trillions of exposure in highly risky ‘nobody knows what they’re worth’ derivatives is a case in point.) What I am saying is that China has sufficient problems in finance – non-performing loans in their own massive housing bubble, environmental destruction (massive air, water and soil pollution), a less-than-sterling reputation in most of the countries where they’ve recently invested, etc. that they are not at all ready to go it alone as some sort of world hegemon. It’s not China-bashing, in my view, to state those realities, just an admonition that those crowing about a “Chinese 21st century,” are going out on a rather slender limb.

  15. Davy, Hermann, MO on Sun, 2nd Feb 2014 7:30 pm 

    J-Gav on Sun, 2nd Feb 2014 4:59 pm

    It’s not China-bashing, in my view, to state those realities, just an admonition that those crowing about a “Chinese 21st century,” are going out on a rather slender limb.

    My thoughts exactly!

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