China-Iran Oil Deal Undermines the Dollar

China-Iran Oil Deal Undermines the Dollar (Source Iran struck a major oil deal with China at a meeting in August, reported the Petroleum Economist on September 3. The crude oil will be paid for in Chinese yuan. This is a blow to the United States dollar. China will invest $280 billion into Iran’s oil economy; an extra $120 billion will go toward improving transport infrastructure. The deal is a major step forward in shifting trade away from the American dollar. Using the yuan to conduct crude oil trade with Iran is a way to avoid American sanctions. Even if the deal is half as productive as China says it will be, it could reverse much of what U.S. President Donald Trump’s sanctions campaign sought to achieve. China’s decision may have complicated its trade war with America. But the fact that it is willing to make such bold claims shows its willingness to push the limits of diplomacy. Petroleum Economist also noted that China plans to deploy 5,000 armed guards to Iran to protect crude oil infrastructure. This would be a major leap forward for Chinese involvement in the troubled Middle East. Again, some have speculated that it may not materialize. But China and Iran did sign a comprehensive strategic partnership agreement in 2016. This is the strongest diplomatic agreement in Beijing’s arsenal. The U.S. dollar is often called the petrodollar because the Organization of the Petroleum Exporting Countries has conducted business with it since 1973. It has been the global oil trade’s preferred currency since the end of the Second World War. In September 2017, China took a major step away from the dollar by launching an oil futures index denominated in the yuan. For the first time, buyers could convert yuan to gold. This brings extra security and flexibility for nations participating in the index, as they are not forced to use the yuan or the dollar. As the world’s leading oil importer, China’s creation of this futures index dealt a blow to the dollar’s status. Russia, the world’s second-largest oil exporter, also began accepting yuan as payment for oil. Saudi Arabia recently threatened to sell oil in yuan as well. Many of America’s rivals are working around U.S. dominance.

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