Oil, Dollars — Sunshine, Yuan
Fossil fuels and finance are inextricably intertwined in Trump’s vision for America. China is our paid-for-in-yuan hope for limiting the resulting climate chaos.
Trump wants America to have factories again. He wants the US to relinquish its 21st Century role as lead global consumer in favor of the manufacturing superstar position the country held for much of the 20th Century. That’s an enormous ask from America’s aging “free enterprise” system. The tools he is using to push it along are tariffs, a weak dollar, and low interest rates — aided by cheap and plentiful US oil, natural gas, and coal.
Those financial and fossil-fuel-energy tools are closely intertwined, both historically and in Trump’s vision for the future. When it comes to oil and dollars, it’s all for one and one for all. And that one is big, beautiful (read: broke, polluted) America.
How many factories Trump will actually get built — or additional oil and gas wells drilled — remains to be seen. In the meantime, his tools are upending not only stock, bond, and foreign-exchange markets worldwide, but also a once fully globalized energy industry that was already grappling with fragmenting markets, geopolitical upheaval, and the rapid approach of peak fossil fuel demand driven by electrification.
One result that is likely to persist — regardless of whether Trump’s traumas bring the trade “deals” he demands — is a big, abrupt widening in the East-West fissure between China’s New Energy vision built around renewable electricity and electric vehicles (EVs), and the Old Energy model built around fossil fuels that propelled the US to that greatness Trump and his followers want to restore. What that will mean for the climate crisis is another of those things that remains to be seen. But if China stays on course, it may not be quite as bad as it sounds.
Dollar Decline
Back in the 1960s, French Finance Minister — and later President — Valery Giscard d’Estaing claimed that as the world’s favored reserve currency gave the US an “exorbitant privilege.” It could borrow as much money as it wanted more cheaply than other financially constrained governments, and a strong exchange rate gave Americans cheap imported consumer goods.
Now, providing the currency in which governments mainly hold financial reserves has become a job nobody wants. Last November, before he got the position he now holds as chair of Trump’s Council of Economic Advisors, Wall Street economist Steven Marin explained in to Restructuring the Global Trading System how and why the US might destroy the global trading system it had once designed — a system with the dollar’s reserve-currency status at its core.
Trump has been insisting “for decades” that the trading system puts US industry at an unfair disadvantage, Marin wrote. The dollar’s role as a reserve currency pushes up the dollar exchange rate since everyone wants dollars to stash away, and it necessitates a huge trade deficit so there are surplus dollars floating around for others to hold. As international trade grew, this became “increasingly burdensome” for the US, Marin added, and manufactures and exporters “bear the brunt of the costs” because the dollar’s “over-valuation” makes their goods and services more expensive for others to buy.
In popular US financial jargon, Wall Street may benefit from everybody holding dollars, but Main Street loses. And Trump voters care more about factory jobs (Main Street) than the state of stock and bond markets (Wall Street).
The Chinese apparently came to a about the reserve-currency job some years ago. While Beijing has tried to find ways to protect its exporters from the potentially damaging effects of US financial sanctions, it has kept exchange controls in place to prevent over-valuation of the yuan, and it has avoided wide issuance of internationally traded bonds, which would be required to promote the yuan as an alternative reserve currency.
Yes, China wants to be paid in yuan for its exports and has been testing out central bank digital currencies and other schemes to permit that. No, China does not want its manufacturing sector to face those very burdens of association with a reserve currency that Marin outlined.
Signs abound that Trump is succeeding in diminishing the dollar’s appeal as a reserve currency. April witnessed a steep fall in both the dollar exchange rate and the price of 10-year US Treasury bonds in the midst of a tariff-inspired plunge in US stock markets. That convergence is not supposed to happen. US financial “exceptionalism” dictates that when there’s a “flight from risk” that causes stock markets to fall, investors shift money into US government bonds, because Treasuries are assumed to be the least risky investment anywhere.
To have US stocks and bonds, and the dollar, falling simultaneously is “not slam-dunk proof that the dollar’s dominant reserve currency status is dead,” but it’s close, one Financial Times columnist . Since then, the dollar and Treasury bonds have continued to drop in price, even as the stock market steadied — at least for the moment.
Oil Decline
But what does the strength of the dollar and its role as a reserve currency have to do with the climate and the planet? Lots. Oil and dollars have been vital, mutually supportive planks of the GDP-growth-oriented US-led global economic order at least since the “petrodollar accords” of 1974 helped stabilize the “Free World” financial and energy systems. Those systems had been badly shaken by the Arab oil embargo and global energy crisis of 1973 and by the overlapping breakdown of the fixed exchange rates and dollar linkage to gold that dated back to the post-World War II Bretton Woods agreement.
The petrodollar accords kept oil priced in dollars through the massive price runups that accompanied Opec nationalizations, kept the excess dollars oil producers suddenly earned recycling through a fortified US financial system, and offered military protection to the Arab Gulf oil states. If the dollar ceases to be the world’s dominant reserve and trading currency, will it undermine not just the money plank but also the oil plank of the US-led global economic order that the petrodollar accords supported?
If it isn’t a reserve currency, the dollar will probably cost less on foreign exchange markets, making US goods and services cheaper in other currencies. Trump wants lower prices for US oil and gas, as well. That would further reduce the cost of US manufactured exports in a world in which the US goes on using fossil fuels while many other countries transition to possibly even cheaper renewable electricity.
All good for US manufacturers and factory workers. But bad for US and other oil and natgas producers, who have trouble making exorbitant profits when oil prices are low. Prices are more important to their corporate health than the gutted environmental regs and easier access to federal lands Trump is offering them in compensation — and many a US oil exec is mighty unhappy.
And what about everybody outside the US? While Trump has pledged US allegiance to fossil fuel production and use, China is not merely the leading producer and consumer of solar photovoltaic, batteries, and electric vehicles (EVs), it is now the absolutely dominant player in the broader energy transition space — where the US is virtually absent.
The EU, Japan, South Korea, Taiwan, and India are reportedly bargaining for peace with Washington in the tariff wars by offering to purchase more US oil and LNG in the near term. However, most are still betting on Chinese renewables and EVs as long-term paths away from fossil fuels. The other two leading oil exporters, Saudi Arabia and Russia, are evidently prepared to go along with the US on cheap oil. All three must be considering their relative market positions as the specter of world recession brings closer the likely “peak” in global oil demand.
New Productive Forces Rise
These shifts start to bring into plausible focus a scenario in which US leadership and dollar pricing of fossil fuels continue in a shrinking Old Energy World, even as Chinese leadership and yuan pricing of renewables and EVs expand in an alternative New Energy World. Other energy producers and consumers are left to navigate the broadening space between those two — a space that is unlikely to narrow again any time soon, even should the US and China strike a “deal” on tariffs and other trade issues.
More and more signs point to such a dual energy reality ahead. Trump is doubling down on the Biden administration’s efforts to keep China’s solar equipment, batteries, and EVs as far as possible from US consumers. Admitting but ignoring climate change, Trump puts fossil fuels at the center of his imagined Made-in-America economic revival. How many tariffs will be retained, how many factories built and how much oil and gas produced remain to be seen.
For its part, Beijing is reportedly doubling down on requests that customers pay in yuan rather than dollars for manufactured goods. It is adding gold to its foreign reserves and selling a few of its still-plentiful US Treasury bonds. But earlier efforts to develop yuan-based oil trading have gone quiet, and newly developed financial structures outside US-controlled channels are evidently working effectively to accommodate its oil purchases from oil exporters who are under US sanctions: Russia, Iran, and Venezuela.
For the last 30 years, China has been the biggest center of growth in global demand for oil. Now, its consumption of diesel and gasoline is in decline, while the outlook for its supposedly ballooning petrochemical output, which oil producers are hoping may keep the country’s overall oil demand on a growth track, has been thrown into disarray by trade war. This may well mark the end of global oil demand growth, even if Trump boosts fossil fuels and beats up on EVs and renewable electricity in the US.
Amid all this, it’s easy to imagine China will find it simpler and more sensible to keep using dollars to buy oil in the Old Energy realm and focus on the yuan and its new trade finance structures for New Energy. Oil and LNG can provide a use and help retain value for the trillions of dollars China already holds in state and corporate financial reserves. Meanwhile, earnings from what Chinese President Xi Jinping has labeled the three vital “new productive forces” — solar gear, batteries, and EVs — can be plowed back into an increasingly domestically oriented economy.
Such a yawning gap between the world’s two largest energy systems doesn’t accord with the way people in the energy industry have ever thought about their business. But it could be where they, and the rest of us as energy consumers, are headed. The US will eventually find its old, oil-based energy system is untenable. China will hopefully double down on its new energy system. Others in Asia, Europe, and the Global South will hopefully move more in tandem with China’s energy vision.
This next stage of the energy transition seems sure to be disruptive. But once you come to see that economic disruption is required before humanity can forge a healthier relationship with the planet, that’s not fundamentally bad. Uncomfortable and unsettling maybe, but not fundamentally bad.
