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China’s creation of the gold-backed petro-yuan

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It is now been months since China launched its oil futures contract, denominated in yuan.

What are the benefits of trading with the Yuan? As China’s oil imports come to be priced in its domestic currency, foreign suppliers will have more yuan-denominated accounts with which they can purchase not only Chinese goods and services, but also Chinese government securities and bonds. – scmp.com

Pakistan Encouraged to Use Yuan Amid China’s De-Dollarisation Trend – sputniknews.com

For the past decade, China’s strategy for internationalizing the renminbi has involved greater reliance on the IMF’s Special Drawing Rights as an alternative international reserve currency. But the launch of renminbi-denominated oil trading this year suggests that China will now pursue de-dollarization head-on.  – project-syndicate.org

What has not been reported at all in the mainstream media is that China and India both refuse to go along with Washington’s embargo on Iranian oil exports. Both countries continue to buy Iranian oil and are devising ways to pay for it in other currencies, bypassing the U.S. payments system. To the extent this is successful, it reduces demand for dollars and eventually, those redundant dollars return to the U.S., adding to domestic inflation. – tribstar.com

What about the petrodollar?

The US dollar , Since 1971, the US dollar was no longer backed up by gold. That was the year then-President Richard Nixon unilaterally withdrew from the Breton Woods Agreement that pegged the US dollar to a gold standard. The US was forced to do this because they had to print paper money to support expenses incurred in the Korean War and the Vietnam War.

When some countries like France, UK wanted to redeem their paper dollars with gold at Fort Knox, the US refused. The US dollar retained its status as reserve currency only because Saudi Arabia acceded to US demand that it sell its oil using only the US dollar, in exchange for Saudi royalty’s safety and security. Thus, the US dollar gained its petro-dollar status. – manilatimes.com

China’s decision to push forward with the Petro-yuan appears to be a challenge to the US’ global energy market hegemony, but it remains to be seen if it can make a significant impact.

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Geopolitics

China Holds the cards on Oil Prices

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Should China decide to defy the latest U.S. tariff threat by ramping up imports of Iranian crude oil in open defiance to the U.S. sanctions on Iran, oil prices could take a significant hit and plunge by as much as $20-$30 a barrel, Bank of America Merrill Lynch warned earlier this month.

in 2018 China import of crude oil: US$239.2 billion (20.2% of total crude oil imports)

in 2019 China’s crude oil imports in June averaged 9.63 million bpd, an increase of 1.7 percent from an average of 9.47 million bpd in imports in May, and a 15.2-percent increase from 8.36 million bpd in June last year, according to Reuters calculations in barrels from data in tons provided by the Chinese General Administration of Customs.

China is the world largest crude oil importer and any moves they make will impact global markets.

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Geopolitics

Mexico’s Crude Oil Problem

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Mexico’s economy has a high dependence on hydrocarbons. 89% of the country’s energy production is made from fossil fuels. It’s a large producer of oil, natural gas, and coal, however, Pemex is producing less and consumes more. This increases the vulnerability of Mexico’s economy. In 2004, Mexico produced 3.4 million barrels of oil on average per day and in 2018 production contracted to 1.8 million barrels per day, that is, the extraction of crude oil was reduced by half. In 2018 the lowest level of production of the last 38 years was reached and in 2019 the trend continues to fall.

Pemex production of natural gas has also been reduced consistently since 2014, which has increased Mexico’s dependence on gas sold by the United States, as this is one of the least expensive and cleanest fossil inputs to generate electricity. Mexico needs to increase its oil production, but it won’t be an easy task because it requires access to wells with a depth greater than 500 meters, and Pemex only has experience in drilling wells with a depth of up to 100 meters.

One of the biggest Problems Mexico faces is the current need for Pemex to import refined fuels more and more, This is the reason AMLO wants to build a refinery so as not to be dependent on a foreign country for its energy needs. Yet, Mexico’s elite is against this, A Government investigation of those against the plan has not been done, as to see if they benefit from keeping Mexico dependent on foreign companies. If that wasn’t enough American rating agency’s are also against Mexico’s move of Energy independence.

Trying to find a balance of investing in infrastructure and exploration is going to be Mexico’s biggest challenge.

Mexican President Andres Manuel Lopez Obrador said Thursday his government will reduce the federal budget burden taken on by state oil firm Petroleos Mexicanos (Pemex).

With the purpose of reducing the fiscal burden of Petróleos Mexicanos (Pemex)

The proposal includes gradual reductions in taxes of Shared Profit (DUC), which is 65%, to a lower rate of 54% for two years.

“These amounts are equivalent to 45.8% of the total accumulated debt maturities for the period 2019 to 2021,” the text highlights, and represents 61.8% of Pemex’s entire annual investment.

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