China’s Digital Yuan Used for Massive International Oil Purchase

PetroChina, a major oil company based in China, has used the digital yuan to make a substantial purchase of oil. This has been an international deal, and its unprecedented scale opens questions about

In a worldwide first and a major upset to the global oil market, the Chinese oil and gas company PetroChina has exclusively used a cryptocurrency, the digital yuan, to purchase 1 million barrels of oil across international borders.

This purchase was announced on October 23, as Shanghai-based media reported that it was carried out in the Shanghai Oil and Gas Trading Center, a trading house established to facilitate easier business transactions with international clients. PetroChina is a major enterprise in the Chinese economy, one of the largest publicly traded firms in the world and the largest producer of oil and natural gas in Asia. The state-run firm is headquartered in Beijing, but this deal was presumably carried out in Shanghai due to its status as an international finance hub; Shanghai is home to one of China’s more sizable oil refineries, but there are several larger ones. 

So, what is the significance of this development to the world of Bitcoin and all other crypto-related businesses? How is the digital yuan, a state-issued token that has existed for a little over two years, relevant to the world of finance? After all, both the coins and the purchaser are under the control of the Chinese government, one of the largest and most powerful nations in the world. The key to understanding several interrelated issues is to recognize the petrodollar’s role in US monetary policy and the flow of worldwide trade. 

Since the US finally left the gold standard in 1971 and the dollar became a fiat currency, the federal government has put a high priority on ensuring that international trade of oil, even between two foreign nations, are carried out primarily in dollars. In other words, although the stable bedrock of the gold standard was gone for good, an “oil standard” has kept this fiat asset somewhat tethered to the production and sale of real goods, as opposed to an unstable world of speculative finance. Naturally, other major nations, both producers and consumers, have had their reasons to be unhappy with this state of affairs.

Russia, for example, took to purchasing oil from India to avoid sanctions after the war in Ukraine, but India is itself not a major oil producer, and served more as a middleman in this arrangement. Much more worrying to US finance, however, has been China, which has been in talks with Saudi Arabia to directly purchase oil in yuan. An additional component of the petrodollar system has been the fact that most or all of the world’s nations have had to maintain a supply of dollars to buy oil, so the dollar unofficially acts as a global reserve currency, giving the US a powerful asset in international finance. Through China’s increasing trade and investment in other countries, it has been steadily working to make the yuan a reserve currency, though it still has a long way to go. 

So, to summarize, the United States has used oil policy to bolster its fiat currency, and there are several major and minor other players that wish for a more decentralized system where multiple currencies are valid. As Bitcoin and its underlying philosophies have become more and more mainstream in the past few years, it seems natural that the forward-looking world of cryptocurrency has served a role in the technological advancement of the oil trade. Venezuela made headlines in 2018 as it launched the Petro, a new cryptocurrency that it intended to serve as a way to avoid sanctions and undermine the petrodollar altogether. Although there was some initial promise in this idea of an oil producer offering sales in crypto rather than dollars, the project has stalled, largely considered a failure by the industry at large. Venezuela simply is not a large enough producer to buck the global trend on its own, and difficulties in their own government have led to a situation where one of the project’s most important officials is now in jail on corruption charges. 

So, the world’s “first state-backed cryptocurrency” has floundered in its years of existence, but there are plenty of other nations with a lot more global influence, and a much more tightly-run ship domestically. In a classic example of China’s tendency to roll out these projects gradually, the digital yuan started small, adding new regions over many months, with the only real international usage being foreign tourists in China. This new purchase, however, has marked a new age for its use as a global asset. The price of a barrel of crude oil is currently fluctuating around $80-90, so it’s easy to see that 1 million barrels in one transaction is a huge purchase. Official coverage is somewhat coy on the issue, neglecting to list a price for this sale, and completely sidestepping the question of whom, exactly, they bought the oil from. Saudi Arabia is a possible candidate due to its past talks with the Chinese government, but there is little concrete data to work with.

If the report was coy to go into detail on these points, then there is truly no way of knowing whether PetroChina intends to make a habit of using cryptocurrency to carry out major transactions like this. For the sake of argument, even if this was a complete one-off, it still shows a major shake in the foundation of the existing financial system. As shown with Venezuela’s Petro, a small producer can have the will and initiative to experiment with crypto to get out from under the petrodollar, but it still needs an actual partner to buy the oil. The Petro was a flawed idea, because the producer doesn’t have any leverage to maintain the value of its new currency, while a big consumer like China can easily back up its asset. So, if it’s a non-starter for these countries to make their own assets, and there’s little more economic freedom in having reserves of digital yuan instead of dollars, it seems there’s a clear answer here. For an asset with an international appeal and intrinsic value, that has no control from the US, China or any other world power, there’s no substitute for Bitcoin.

Trading oil for Bitcoin makes a lot of sense, from the producers’ point of view. If one or several such countries wished to offer sales in bitcoin, there are several prime candidates for purchasers, in oil-hungry countries that are somehow maligned by US hegemony. Presumably, the US would never renege its commitments to the petrodollar, and China clearly has the strength to use its own currency, but oil is a worldwide commodity. What if India decided to make this deal, since it’s already been looking to subvert the petrodollar system via its actions within BRICS? How about Iran, which is already a major target of American sanctions? Brazil has been vocal in criticism of the petrodollar, and it is one of the world’s ten largest oil consumers. It produces even more than it uses, however, so there would be no shortage of potential buyers across Latin America. 

By making this purchase in cryptocurrency, China has carried out an unprecedented step in building a post-petrodollar world. Who knows how many of these deals it will make, with how many countries? Perhaps Venezuela’s state-run asset was not just misguided, but also ahead of its time. If many major producers start using crypto-assets to settle petrol, how long will it be before they start trying the world’s premier digital currency? The ethos and structure of Bitcoin’s blockchain are in line with everything certain nations would want, including an opportunity to conduct business without another country controlling all the terms. The window for a new economic future has cracked open, and a world of possibility is visible on the other side.