When Oil Trades Like Bitcoin
Today’s Daily Reckoning has no choice but to interrupt your regular programming.
Our head office is located in Victoria, and we southern types are enjoying a day off for Labour Day.
We’ll have to put the latest news and market moves aside for now.
However, we can use the time to take a look at some longer-term trends.
One of those is the ongoing ascendancy of China.
Bloomberg reported last week that China’s economy is set to overtake the Eurozone sometime in 2018.
There’s only one spot to go after that…
The day China shakes the world is coming
We can see the ascendancy of China in other ways. You might recall, if you’ve been reading the Daily Reckoning for a while, that I pointed out last year that oil futures were due to begin trading in Shanghai.
These contracts are due to go live this month. The most interesting part about it all is that these contracts will be settled in China’s currency, the yuan, and not US dollars.
Here’s why I bring it up…
The US is the only country in the world that can import real goods — like oil — simply by printing new currency reserves. Every other country has to earn US dollars first — via exports bringing in foreign exchange — to pay for the imports.
It’s rightly called an exorbitant privilege, and its days are numbered.
Recall that China is by far the largest importer of raw materials in the world.
There will come a day that China tells Australian iron ore miners that they’re going to get paid in yuan whether they like it or not. That day will shake the world.
When that specific date is due, I can’t tell you for certain. But China is going to flex its buying power at some point.
Granted, it’s unlikely to be anytime soon. China needs to liberalise its capital accounts first.
But there’s a wildcard to all this I need to tell you about…
A wildcard for the global trading system
It’s called the blockchain. This has the potential to upend the use of national currencies for trade.
The blockchain is a ledger. It can record what is delivered, when, and to whom. All we need is an agreed protocol for the energy industry, and it could be built with a native token to transfer the value.
Call it OilCoin if you like.
It would actually be a massive improvement on what we have now.
I read a research report on the oil market just last week. The analysts were trying to get an approximate estimate of supply and consumption.
One of the regular challenges to this is something the industry calls ‘missing barrels’. This refers to oil that is produced but not consumed, and is not visible in inventory statistics.
On a blockchain, that kind of thing can’t happen. Every transaction is recorded at every point of movement.
Think of the hundreds of billions of dollars involved in oil trading at any one time. And yet analysts often have sketchy data to work out whether they think the price will rise or fall based on supply and demand.
And this is for the most traded commodity on the planet!
It’s remarkable in this day and age just how much more efficient capital markets can still become.
The same potential outcome is true for all commodities and assets as well.
But it also highlights another way the US ‘King Dollar’ can be dethroned…
The capital markets will migrate to the new tech now
The US is currently running a government deficit and racking up huge federal debt. Those are typically ingredients for a currency crisis — except the US dollar is the world’s reserve currency, which gives the US free reign to amass debt.
Should that basic equation ever change, international creditors might not be so willing to buy 10-year US debt at 2–3%.
That means the American public would be forced to finance the US government deficit, and interest rates would soar.
It does highlight how important the blockchain development could prove to be.
For example, last year, did you know that France approved unlisted securities to trade over digital ledgers?
Brokers are on their way to becoming redundant.
Just this month two major banks — Credit Suisse and ING — completed a €25 billion securities swap using blockchain-based software.
The capital markets are going to be migrated over.
It’s exciting, and should prove very profitable for the firms that can take advantage of it.
That’s capitalism for you.
Where there’s profit, someone’s always coming for it.
Editor, The Daily Reckoning Australia