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This post was edited by abramicus at 2015-4-10 06:00|
THE SAUDI SOLUTION TO THE BLOWBACK OF INCREASED DEMAND FOR OIL IN CHINA DUE TO THE RELENTLESS REVALUATION OF THE YUAN - ACCEPT THE YUAN AS PAYMENT FOR OIL.
SA realized at the previously elevated prices of oil, it was steadily losing market share or volume to the US oil producers who are able to extract more oil per rig than before, using fracking techniques. It also realized that there is no possibility for the new oil producers to agree to cut down on their production volume given the profits to be made at the previously higher prices of oil. Therefore, it is a simple matter for their economists to solve for the volume of their production that will bring down the prices, even below cost, in order to force the new oil producers to stop producing oil. Unfortunately, that volume of production, does not exist. There is enough volume that SA can add to the oil supply to deter new rigs from being put up, and to retire a few rigs besides, but not enough to shut down most of the existing producing oil rigs in operation.
Factors unforeseen or underestimated by SA include the storage capacity of its existing customers, who prevent the production volume to drive down the price any further until their storage capacity is exhausted. Unforeseen is also the increased usage of gasoline by the public when the price drops below $3.00 per gallon. Helpful factors are the unexpected slowing down of the Chinese economy that is headed south toward 7% and below by next year. This is offset by China's determination to keep the Yuan overvalued against the dollar, at all costs, to demonstrate the ability of the Renminbi to do the functions of an international reserve currency, forcing down the price of gasoline domestically.
Maybe, it is the offsetting of the Yuan appreciation that the latest SA discriminatory higher pricing toward Asia is aimed at achieving. Which, brings us to the original point of this thread, that the SA hike in price of oil sold to Asia is targeted against the appreciation of the Yuan and thus, its achievement of international reserve currency status based on that. Or, willy nilly, SA was trying to discourage the increased use of gasoline in Asia that is preventing the drop in oil prices needed to shut down, not just the creation of new rigs, but the production of existing rigs, but in the process, is heading into a collision with China's drive to achieve international reserve currency status for the Yuan. SA is using up its 700+ billion dollars of reserve currency to achieve its goal. China is using up its 3,800 billion dollars of reserve currency to achieve its goial. This ends up pitting SA against China, causing both to use up their reserve currencies, one to force down the price of oil, and the other, to force up the price of the Yuan, in a vicious cycle of burning through their currency reserves, benefiting neither in the end, which smacks of another ECONOMIC HIT MAN job on SA which is just initiating its price war against Asia (mainly China), when in actuality, its goal will be blocked by China's far larger currency reserve, plus its non-oil-related GDP that can keep generating more foreign currency reserves, while SA's non-oil revenues from the investment of its sovereign welath is smaller by far than China's revenues from its sovereign wealth investments plus its non-oil manufacturing and exports.
Instead of being loggerheads at each other, SA should simply offer to sell oil to China in Yuans that bypasses the cheapening of oil in China due to China's overvaluation of the Yuan. Even if costlier than buying it in dollars, China saves its dollar reserves for other imports from other countries that currently do not accept the Yuan as payment. This satisfies China's need for oil without encouraging increased consumption due to the exchange rate revaluation of the Yuan, and at the same time, allows SA to hang on longer with increasing the volume of its oil production at the depressed price of oil it intends to achieve to stop existing rigs from producing oil. Turning a lose-lose proposition into a win-win proposition takes only one step, which is to cancel the hike in price of oil to Asia as recommended by its economic hit men, and replace it with accepting Yuans for payment of its oil that prevents China's over-consumption of oil due to its relentless engineered appreciation of the Yuan.